Debt Consolidation

Debt consolidation simply means acquiring a new, larger bank loan in order to pay the debt that exists on many smaller loans. Prime reasons that debt consolidation is used is so that a low rate of interest can be secured, or so that a certain fixed rate of interest can be secured, or even further, to make debt management easier by having just one overall loan.

When to Use

There are a few key times to consider using a debt consolidation program. For example, if a person currently holds many separate loans, there is the possibility that by combining all of those smaller loans together into one large loan (consolidation), debt management may become much easier in terms of there being just one payment to make per month rather than many payments. Furthermore, by consolidating one’s debt into one loan payment, the time required to pay off the loan actually becomes longer, which will significantly lessen the monthly payments required (smaller payments and smaller interest rate). Also, this side effect of having decreased monthly payments can quickly provide more disposable income, seeing as that income no longer needs to be used to make large monthly payments. Additionally, debt consolidation can be utilized quite effectively to manage several debts with very high interest rates, such as when a person has many credit cards with high balances and high interest rates. Thus, through consolidation, one can combine many credit card balances into one balance, one debt, and hence lowering the interest rate. This method to manage credit card interest rates is in opposition to, say, the low interest rates associated with a home equity loan.

Things to Remember

If debt consolidation is something you are seriously thinking about utilizing, there are a few key reminders to consider before you decide to consolidate. For example, debt consolidation may not be right for your financial situation. In fact, it may end up being a hindrance, in terms of the fact that consolidation will not get rid of your debt. The money you owe is still outstanding, and you are still required to pay it back in full. Also, consolidating may make it seem as though one has decreased one’s overall debt. This is not true. And so when one notices more available credit on their cards, and thus begins to spend credit again, such behavior will only deepen the amount one will eventually owe.

Furthermore, contrary to popular belief, you could actually, in the end, pay increased interest on your consolidated loan, due to the fact that if the one large loan provides an extended payment period over time, the interest rate may be higher. However, such a side effect may be advantageous to you if you happen to find yourself able to more effectively manage your finances under debt consolidation.

Finally, be aware the inherent risk in debt consolidation because oftentimes consolidation programs involve the use of a home equity loan/line of credit. Thus, if you happen to begin missing your regular consolidation payments, you may be have a serious chance of losing your house. Even though a credit card company is not allowed to take away your home, by way of putting up your home for collateral as part of the consolidation, your home is now open to foreclosure.

How to Find

There exist a number of ways to go about acquiring a debt consolidation loan, and it is a smart move to do your homework before choosing your route. For example, some good places to start your search for a consolidation loan are:

Visit your bank that you regularly deal with. They will know you and understand your current financial situation, as well as being able to work out with you a good affordable consolidation plan.

Conversely, try talking with a bank or credit union that does NOT know you. These institutions may offer you an even better consolidation deal then your usual bank would, as they may be attempting to gain your business.

Be wary of a lender offering you a debt consolidation via mail. These companies have contacted you because they simply want your business. So be sure to deal only with financial institutions that you trust, lest you find yourself involved in a money scam.

Conclusion

Overall, as with any financial matters, preventive measures should be taken. Be careful with your money and credit so that either you never find yourself needing debt consolidation or if you do need it, the ease of access to such programs will not be too difficult. Also be aware that a low credit score will affect your chances of qualifying for consolidation programs.