Is debt consolidation the answer to your financial struggle? If you are like a lot of other people, you have credit card debt that is eating into your quality of life. You might spend a good part of your paycheck on your credit card balances.
You have probably heard the advertisements on the radio and television about how you can save money by putting all your credit card balances into one manageable payment. The reason this might work is because of the way lenders see the issue of risk. The higher the risk the higher the interest rate.
You see, the lender takes into account the chances of not being paid back. If the loan is unsecured, then the interest rate on the loan will be higher. This is why interest rates on credit card debt is much higher than on mortgage loans.
There is no collateral to sell off on credit card debt. You use your credit card to take a vacation, buy a pair of shoes, buy tickets to the game. If you default on our credit card balance, there is nothing the lender can sell to recoup their loan. So they charge a large interest rate to make up for the money they lose when people default on their loan.
If no one defaulted on their credit card loans, the lenders would not need to charge a high interest rate. But they would anyway probably because they like making a lot of money on their loans.
But on home mortgage loans, the lenders can charge less in interest because the loan is secured by the real property. The lender can sell the house if the borrower defaults on the loan in order to get their money back. Real property in most cases goes up in value, so lenders are more likely going to get their original loan back and in some cases, more money because of the built up equity.
So consolidating your debt will get you a better interest rate. And you will be able to write off the interest you pay on your annual taxes. So it might be a good choice for you. But make sure you understand all the facts before you sign onto a new loan. Debt consolidation means that you are placing your home as collateral for your credit card balances. You will get a better interest rate, but if you default on your new loan, you will lose your home.