Debt Consolidation Loan
Debt consolidation is a topic that has been debated among Christians, however there is not Biblical evidence to suggest that a debt consolidation loan is wrong. Having said that the debt consolidation loan should not be a first step toward resolving multiple outstanding debts due to the nature of this type of loan.
The Purpose of a Debt Consolidation Loan
A consolidation loan is designed to give the borrower one lump sum of money at a relatively lower interest rate in order to pay off several smaller debts with higher interest thereby simplifying the debt repayment (multiple bills are now one) and in many cases lowering the interest rate. A debt consolidation loan will also usually lower the monthly payment by extending the length of the loan repayment period.
Typically a debt consolidation loan is utilized by borrowing money against the equity in the home to provide the money to pay off multiple smaller debts such as credit cards, furniture payments, or even a car. It is important to understand the difference between a secured loan and an unsecured loan when transferring debt through a debt consolidation loan.
Secured Loans vs. Unsecured Loans
A secured loan has collateral that backs up the loan amount such as a house. If payments are not made on a secured loan the item that is not paid for can be taken away. An unsecured loan on the other hand uses personal credit history and a credit score to evaluate an individual's credit worthiness such as with a credit card. Defaulting on a credit card will mark your credit history and may take several years to fix.
When evaluating the idea of a debt consolidation loan consider that transferring the debt from a unsecured loan like a credit card to a secured loan such as a second mortgage can put your home at risk if the debt consolidation loan is defaulted on. Additionally a lower monthly payment and new room on the credit cards can lead to unnecessary spending and end in deeper debt.
Debt Consolidation Loan Considerations
Additionally moving debt from a credit card that may take a few years to pay off to a home mortgage that is typically set at 30 years prolongs the debt repayment cycle. Once consolidated the debt is locked in and will take the lifetime of the mortgage to pay back. Even at a lower interest rate the length of time allowed to pay this back may end up costing more over the term of the new loan.
God's plan for us is not for us to have debt. No matter the reason for your debt strive daily to pay down your smallest debts first and use the extra to continue paying down the acumulated debt. Prior to considering a debt consolidation loan make sure that a disciplined budget is in place to stop the unnecessary spending of resources once the debt consolidation is finalized.
s Never borrow more than is needed to accomplish the debt consolidation and use the extra money created each month to apply extra payments to the debt consolidation loan repayment. A debt consolidation loan should never be used to enable additional spending.