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Posts Tagged ‘Debt Consolidation’

How many people really have the discipline, once their monthly payments are lowered, to pay off their debt rather than spend the extra money and rack up more debt? This is one of the reasons why debt consolidation is not a cure for credit problems. In fact, it could actually make problems worse, by allowing a person to get into more debt than they started with.

It all sounds good in paper – taking out a single loan to eliminate all debts and paying back what you can afford to pay each month with no stress whatsoever. But, is debt consolidation really a good strategy?

Usually people who consolidate do so because they have exhausted other means of financing, are deeply in debt and are thinking to buy time and borrow as much as possible. Debt consolidation does take out the stress of being in debt, as your lenders do not send you late notices and charge you all sort of late fees considering the fact that you are making a sound move to repay them.

This is when it gets too comfortable. A splurge during the sale looks tempting, and a holiday is long overdue. Nothing is hard to access nowadays with a credit card. Pretty soon, you’ll find yourself in your old ways, abusing whatever credit facility you have. Remember that when you consolidate, you may be living in the safe zone again but it doesn’t mean that you are debt free.

In fact, the opposite is true – as you are actually taking more time out of your life to repay the debt in exchange for a fraction of payment you can afford every month. Anyway you look at it, debt consolidation IS being in debt longer.

Entering into debt management can be a very effective way to reduce your debt and all but eliminate the stresses it causes, but there’s also a pretty major problem with it. Consolidation is a popular ‘quick fix’ and can simplify your finances considerably, at the expense of more interest being paid in the long term, and is a good choice for people who are struggling with their debt to a moderate level.

If getting out of debt is a plan, then debt consolidation is just a tool to help the plan. It take much more than just covering outstanding loans which you service on time each month. A lifestyle adjustment is necessary but how you view and manage money will have to change too. For example, if you are used to the idea that any big ticket item is within reach through credit card installment, that mindset will have to go.

Nevertheless, debt consolidation is indeed a valuable tool, if you use it to your advantage. If you have massive credit card debts famous for its notorious interest rate then debt consolidation is a no-brainer. Consolidating your debt is only the first step to take charge of your finance. Next come the hard part – being disciplined. If you miss just one payment, interest rate could skyrocket to 20% per annum depending on your lender.

It’s possible that with so much debt, you may not qualify for an additional loan. Not all non-profit debt consolidation services are looking out for your best interests. Lenders are banking on your desperation to get away from bankruptcy. Selecting a good lender means winning half the battle, and with the advancement of the internet, your task has now become much easier.

At the end of the day, you should really have a clear idea of why you want to consolidate and how well you can stick to the plan. It is simply put, the judgement of utilising a financial tool to your gain. It takes not just the tool, but the whole plan for debt management to work. Before you take on a debt consolidation loan, ask yourself if you have got the discipline to keep up with payment and limit your spending.

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People with large debts always assume they just can’t afford to get out from under their debts, so they let them pile up dollar-by-dollar, year-by-year. No one has to live with large debts, there is always a way out. Debt consolidation is for anyone who has debts and cannot currently afford to make their monthly payments. It’s so easy for multiple monthly payments to add up to the point where you just can’t do it anymore. So, you put it off for one month, and one month becomes three, three months become six, and before you know it you can’t possibly catch up. Debt consolidation can get you out of the debt trap that you’re in. Anyone who has debts that they cannot pay should at least consider debt consolidation before taking more drastic and permanent steps.

Only in very extreme cases is bankruptcy a good idea, most people can handle their debt through consolidation. Bankruptcy will leave a scar on your credit history for a long time, much longer than the seven years that people say it will. Unless a professional advises you that there really is no other way out of your debt, bankruptcy isn’t the answer! Debt consolidation is the perfect alternative to bankruptcy because with consolidation you can pay off your debts, and while it isn’t instant, it will improve your credit in the long run.

Debt consolidation works by gathering all of your debt, and working with the people you owe money to, to reduce interest and even take a small portion of the principal amount due off the bill. Doing this with each bill will lower your personal debt up to twenty percent, and when you are talking about large amounts of debt twenty percent can be a lot! Twenty percent can mean the difference between doable and bankruptcy. Twenty percent can mean keeping your home or having it foreclosed upon!

The first step after gathering all your debts and reducing them as much as possible is to do an income to debt comparison. This ratio will determine if debt consolidation really will work for you. For instance, if you make fifty thousand dollars a year and only have ten thousand dollars worth of debt, you’ll definitely be able to work out arrangements because your debt doesn’t greatly outweigh what you can bring in over a couple years time. But, if your income is only twenty five thousand dollars a year and you have a two million dollar debt, it may be difficult to ever get on top of that. Your debt needs to be something that you can realistically expect to pay off within a few years time. A debt consolidation professional can take a look at your specific debt to income ratio and let you know if you are a good candidate, of if you really need to consider bankruptcy as a last resort. Not paying on the debts isn’t an option, because bad credit robs you of your buying power, and you need that!

Even if you think that your debt is outrageously high, you should still consult with a debt coordinator. Even if your debts are high now, you should see what a debt consolidation company could do for you as far as reducing interest and debts. Don’t be discouraged until a qualified professional (or two!) can tell you that consolidation really isn’t an option for you. Don’t give up until you’ve tried everything, you can’t just roll over and taint your credit without being one hundred percent sure it’s your only option.

The majority of people do qualify for debt consolidation, which is great! Even though no one wants to pay a bill, many consolidators are able to get all of your debt into one monthly payment. One monthly payment takes the stress out of paying the bill, and also makes it fast and convenient. Your consolidator will work with you and your debt to determine what you can afford and what will make your debt collectors happy. Often, debt needs to be consolidated in two or three parts, to fit within your monthly payment. It would be ideal to do it all at once, but celebrate the fact that you are able to pay on your debts at all!

Debt consolidation isn’t easy, but it is the answer for all those bills and collection agencies that are calling you. Once the process is started, debt consolidation is easy, and relatively stress free. Be sure to be honest about what you can afford monthly, so as not to lapse on your consolidation payments. The last thing you want to do is take steps backward after you’ve come so far. Each time you make a payment on your debt you’ll feel the weight lifting, and you’ll be able to sleep better at night knowing you are making a dent in the debt you have.

No one tries to go into debt, but it’s easy to fall into a debt trap. Medical issues, financial strain, or job issues are common reasons for debt. Getting into debt isn’t fun, and getting out isn’t much fun either, but once you are there it’s worth the effort. And, living debt free is a lot more fun because you’ve regained your buying power. You’ll have a lot more respect for yourself and your ability to follow through, and other companies will be willing to give you a second chance when they realize you have righted your wrongs.

So, who is debt consolidation for? Everyone! Everyone should at least consider consolidating his or her debt. There is no easy way out of monthly payments that cannot be met, but this is the best way to get control back of your life and your finances. Even if you have huge debts, contact a debt consolidation company in your area for a free consultation! You’ll be so glad you did, because you’ll gain confidence, respect, and get some much needed guidance to succeed in the future!

About The Author
Jeff Dragt For a free online debt consolidation quote please visit http://www.eliminatecreditcarddebtonline.com. Helping people get out of debt one client at a time.

Managing overwhelming debt is a more common problem than most people think. Unfortunately, people coping with large amounts of debt are often unaware of all of the options they have or, worse, think of all debt solutions (from debt settlement to debt management to bankruptcy to debt consolidation) as more or less the same thing. They’re not. Debt consolidation is a completely different approach to debt than all other methods. Debt consolidation is not right for everyone and not everyone can qualify for it. But for the right people in the right situations, debt consolidation can be by far the best method of getting out from under large amounts of debt … without hurting your credit!

Unlike bankruptcy, you do not need to get a judge involved and file legal paperwork to consolidate debt. Unlike debt management, you do not need a counselor or agent to act on your behalf. And unlike most plans of debt relief, debt consolidation done correctly will not hurt your credit score or your financial reputation.

Of course, debt consolidation is not for everyone. Financial woes have a way of being unique, and every single person or family facing mounting debts has a lot of special factors that come into play. Financial plans designed to help people cope with debt can never be considered as one-size-fits-all.

Besides that, not everyone (even those who want and need it) can qualify for debt consolidation.

Quite simply, debt consolidation is a way of rolling many debts together, taking out another loan to pay them off, and then managing the consolidated debt. In other words, you take out a big loan, use it to pay off all of your credit cards and other debts, and then pay off the big loan.

This sounds counter-intuitive. For the person already saddled with debt, the thought of adding another debt is probably terrifying! And how can adding one more colossal debt to the mixture help you?

The answer is not that you are simply getting another loan, it’s really a way of re-organizing or re-structuring your debts. For example, let’s say you have seven credit cards. You’re maxed out on three and you owe differing amounts on the other four. Altogether, you owe $82,000 on credit cards. Now let’s say that there is $22,000 in car notes and another $4,000 on a revolving plan from a furniture store and the total debt adds up to $104,000. That may sound high to some people, but it is really not all that unusual!

Now look at the interest rates on those loans. This can take some detective work, but that information should be available on your monthly statements. If it is not or you can’t find it (or figure out what they’re talking about), call the toll-free customer service number most such companies have and discuss the loan with them. You want to know the interest rate, which is the percentage of the total loan the company charges you for the privilege of borrowing its money.

You will probably discover that interest rates are all over the map. Department store credit cards are traditionally pretty high (22% is not unheard of). Other credit cards span a pretty broad range (16% to 20% is fairly normal). An in-store loan for furniture is likely high (22% is typical) but the car note might be half that (10% to 12%…again, these vary widely).

If you have debt, you are paying not just the actual amount you borrowed, you’re also paying interest. Interest is the dirty little secret of debt because it keeps accruing, day after day after day. The longer you take to pay your loan, the more interest you’ll pay. In fact, if you take long enough to pay off a high-interest loan, you can wind up paying more in interest than the loan itself!!

Think of sales tax. Here in Texas, where I live, we pay 8.25%. That seems high to me, and most of my fellow Texans will agree. But most interest rates on credit cards is double that-over 16%. Imagine paying double sales tax! That’s how interest can really add up.

Coming back to our example, you owe $104,000 at a variety of interest rates. What if you could get a loan for $104,000 at, say, 12%. Would that make sense? You now swap out your many smaller loans for one giant loan at a much lower interest rate.

But let’s look at the car note. If you’re paying 12% or less interest on that, it would not make sense to pay it off and then take out a new loan at the same or higher interest!

Can you actually find lower interest rates? A lot depends on how low you need to go, how good your credit is, and many other factors. A big plus in debt consolidation is home ownership. If you own your own home, you may be able to get a home equity loan or refinance the mortgage in such a way that you can extract money from your home to pay off your debts. A mortgage company, banker, or debt consolidation professional can help you figure out if that works.

If you do not own your own home, do not give up. Debt consolidation may still be possible using a line of credit (a type of unsecured loan obtained through a bank, credit union, or financial institution). You may also be able to borrow money using something else of value (a 401(k) account, stock account, property) as collateral. Any time you have collateral, it’s easier to get a loan and you’ll likely have more clout in getting lower interest rates. That is because collateral means lower risk to the lender. If you put up your retirement account as collateral for a loan, the lender has the right to take funds from your retirement account to pay off the loan.

It is tough to make broad statements about debt consolidation, but you are a pretty good candidate if you have an uncomfortable amount of debt and at least two of these things is true about you: (a) you own your own home, even if it’s mortgaged, (b) you have a lot of debt at interest rates around 20% or higher, (c) you have good credit.

There are some definite advantages to debt consolidation. First, because you pay off your debts, it does not hurt your credit score and may even help it. Second, debt consolidation is an ethical solution that will let you feel good about yourself because you end up paying your debts in full (some people in bankruptcy end up feeling embarrassed or ashamed). Third, it is smart money management.

However, before embarking on debt consolidation, you need to get the facts. There are lots of online and offline places to seek information and there are also companies and counselors who can advise you. One often overlooked source of information is your own hometown bank. Bankers know a great deal about borrowing money and can probably give you free advice if you call and make an appointment. (I suspect that if you go to your bank, it’s more likely that you’ll get lots of good free financial advice from a professional banker, but I have heard of people who got great and free advice from banks where they were not even customers!)

Keep your eyes open if you consolidate debt. Debt consolidation does not make debt disappear: you still have to pay it off. It also does not really help you change your financial ways; you’ll have to take steps yourself to keep from digging yourself into debt again. But for the right people, debt consolidation can be a great way to manage overwhelming debt sensibly.

Mandy Karlik is a freelance writer. To read more of what she has to say about the basics of debt consolidation, click through to http://www.debt-consolidation-diva.com