When it comes to debt relief advice for residents of Las Vegas, the idea of taking on debt to get out of debt might seem ridiculous. Still, it can be a useful approach — under the right circumstances.
People have long used debt consolidation to make debts easier to pay off.
However, what’s good for some might not be right for others. This raises the question: when are debt consolidation loans a good idea?
What Are Debt Consolidation Loans?
We’ve all heard the old saying: “Don’t put all your eggs in one basket.” While that might be good advice in general, when it comes to eliminating debt, ignoring it could serve you well.
To perform a debt consolidation, one takes out a low-interest loan in an amount capable of encompassing all their outstanding high-interest debt and uses the proceeds to pay those debts in full. The person is then left with one monthly payment, ideally at a lower interest rate.
This can result in considerable savings, as well as make their debts easier to manage. In some instances, the payment on the consolidation loan can also be less than the total of all the consolidated bills, which can free up cash for other purposes.
Types of Consolidation Loans
In most cases, people seeking debt consolidation advice for Las Vegas residents (or anywhere else for that matter) will be looking at one of three types of loans. These are personal loans, balance transfer credit cards and home equity loans.
Personal loans, also known as signature loans, are advantageous in that they usually have lower interest rates than the credit card debt most people consolidate. They also come with a fixed interest rate and specific repayment terms. These characteristics make budgeting around a personal loan easier to accomplish.
They’re referred to as signature loans because the borrower’s signature is the only collateral required to get the loan. Because of this, one must have a very strong credit score to qualify.
Balance transfer credit cards, as the term implies, move credit card debt from one card to another. The enticement to do so usually comes in the form of a period during which no interest will accrue (a zero-percent transfer offer). Or an exceptionally attractive rate (such as one percent or less) will be applied during the “introductory period.”
The key to making this strategy work is to avoid transferring more debt than can be paid off during the grace period. Interest rates typically skyrocket when the introductory period ends. Further, some of these transfer offers will apply interest to the unpaid balance retroactively — all the way back to the date of the transfer.
Home equity loans are generally the least costly approach to consolidating debt. With that said, one must be careful to ensure that the fees that go along with a home equity loan won’t make this strategy more costly than staying the course with the existing debt. Home equity loan interest rates tend to be the lowest of these three options because home equity loans are secured by your home.
In other words, defaulting on a home equity loan could result in a foreclosure. Many financial gurus advise against this approach, as it trades unsecured debt for secured debt. However, if you’re certain you can repay the loan, this is the most favorable option of the three — assuming you have equity in your home.
Is Consolidation A Good Idea?
So, are debt consolidation loans a good idea?
As with so many other things in life, the answer is “It depends.” One of the most important things to remember when employing debt consolidation is to avoid creating new debt until you’ve paid off the consolidation. Otherwise, you’re just digging a deeper hole for yourself.
This can be particularly tempting because suddenly, all of your credit accounts will appear to have zero balances. However, it’s important to recognize that taking out a consolidation loan does not pay off your debt. Rather, it just moves it around to make it easier to manage.
If you can meet the terms of the consolidation comfortably, this tactic can work for you. However, it will only make matters worse if you cannot.