Is a Bill Consolidation Loan
Right for You?

Regardless of why you have accumulated a lot of debt, a bill consolidation loan may or may not be in your best interest. It is often referred to as a debt consolidation loan. The primary objective of this type of a loan is to take all your current bills and lump them into one payment.

Ideally, you want to lower your monthly bill and interest rate. On the surface, it sounds like a great idea. However, before you rush to sign up, there are several pros and cons you should review.

Five Types of Bill Consolidation Loans

You can consolidate your debt in a number of ways. Each has its pros and cons. Five of the most common methods to consolidate debt are:

1. Credit Card Debt Consolidation
   
   Pros: One of the easiest ways to consolidate your bills is to put them all onto one credit card. Credit cards are generally easy to obtain and require no collateral. In many instances, credit card companies will wave the interest payment for the first year. This allows all of your payment to be applied to the debt.
   
   Cons: After the first year, your interest rate will usually be a minimum of 10 to 12 percent. At this point, a large part of your payment will be interest. If you fail to make a payment on time, you will be charged a late fee. This will significantly add to your debt. After two late payments, your credit scores will be reduced… and your interest rate will increase by as much as ten percent or more!
   Unless you are very good at budgeting and disciplined in paying, think twice before using a credit card to consolidate your bills.
   
     
2. Debt Consolidation Mortgage Loan: Home Equity Loans
   
   Pros: If you own a home, you can borrow money using your house as collateral. The interest rates are much lower than using a credit card. In many cases, they may be one-third the interest rate.
   
   Cons: The major problem here is if you default on your payment, you will lose your home. Also, be aware of fees or points you may have to pay to get the home equity loan. If you have too much setup cost, keep looking.
   
     
3. Debt Consolidation Mortgage Loan: Home Refinance Loans
   
   Pros: A home refinance loan can free up some of the equity in your home to help pay off your debts. This is especially helpful if your other bills are high interest debts. Your monthly bills could be significantly reduced. For example, if you get a home refinance loan for 6% and you’re paying off credit cards with a 20% interest, it’s a no brainer. Just be sure to shop around.
   
   Cons:  Be sure to read the fine print. Sometimes you will see a great rate advertised. However, upon close inspection, you may be charged a large setup fee or points. This could negate the benefit. If you do not have much equity in your home, you need to be very careful. If you get a refinance loan, you may owe more than the house is worth. If you try to sell it, you will lose money. If the real estate value depreciates, you could lose money. It’s best to have a longer-term payment period in mind when considering this option.
   
     

4. Debt Management Counseling
   
   Pros:  A good credit counseling agent’s objective is to help you get out of debt. They do not normally consolidate your bills. They normally work out a plan with your creditors to help you pay your bills. Usually this includes a reduction in the interest rate. You pay the counseling agent a single payment. Then, the agency pays your bills. Using a credit counseling agency normally will not affect your credit rating. You should be able to pay off your bills in three to six years.
   
   Cons:   If the credit counseling agency pays your bills late, your credit rating will be hurt. You will also be responsible for any additional fees because you are legally responsible. If the credit agency charges a monthly fee, do the math to see if you’re really saving money. Be sure to shop around for a good credit counselor. 
   
     
5. Retirement Loans
   
   Pros: If you have a 401(k), 403(b) or company pension plan, it may be possible to borrow from your retirement funds. There is no pre-qualification process or credit check to endure. Your interest rate will normally be quite low.
   Note: You cannot borrow from your IRA retirement funds.
   
   Cons:  Remember, you are borrowing against your retirement funds. If you withdraw your retirement loans, you will be subject to a 10% penalty plus you will pay taxes. In addition, if you leave or lose your job, you may be subject to an immediate retirement loan payback. Otherwise, you will pay taxes and penalties for early withdrawal. 

If you need to resolve your debt problems, one of these five debt consolidation loan options will normally work. Realistically you should have a specific plan that will pay off your debts within three to five years. So, if you’re serious about getting out of debt, choose the best type of bill consolidation loan for you and get started today.