What is Debt Consolidation?
Debt Consolidation:multiple debt or credit lines and consolidating them into one new payoff plan. Frequently, this is a consolidation loan, provided to consolidate debts into one loan with one payment, typically shifting credit card debts to secured debt by refinancing a mortgage. It could also refer to a credit counseling or debt settlement program.
Debt consolidation doesn’t reduce your debtit merely eliminates multiple high interest rates associated with debt from various lenders. The one thing you need to consider regarding debt consolidation is whether or not you can aggressively start paying off your debt via debt consolidation. Remember, debt consolidation doesn’t reduce your debt; it just helps it be more manageable. So, you need to analyze your finances to see if you can truly start paying off your debt. See where you can cut back on your expenses. You’re going to have to make some personal sacrifices if you want to get out of debt. If even after you analyze your finances and you just can’t seem to set aside enough each month to significantly pay down your debt, debt consolidation might not be the solution for you. In this case, you’re going to want to consult a debt counselor.
Usually, by the time someone decides they need a debt consolidation loan to pay off all of their other bills; their credit is a bit on the poor side. Having a low credit score, or numerous late payments made on your bills will make it very difficult, if not impossible to obtain a debt consolidation loan. Many times a debt consolidation loan needed to the people who are making their payments late (which spark their interest in the debt consolidation loans in the first place) is not available to them as these costumers may not qualify for the debt consolidation loan.
Some debt consolidation companies are after this… and take advantage of this issue. While you won’t qualify for their best loan products with bad credit, they might try to entice you with a high interest loan that results in lower monthly payments. What’s wrong with that, you might ask? Isn’t having a lower monthly payment the entire point and reason for consolidating your debts with a loan? Yes… except that a loan with 22% interest and lower monthly payments means you’re going to be paying even MORE to pay off the original debt than you would have if you continued to make your regular monthly payments.
While not the ideal situation, if you really cannot keep up with your monthly payments as they are, you may have to consider that 22% interest loan, or search for ways to increase your income so that you can keep up with your monthly payments.
Credit Card Balance Transfer Offers for Consolidation
Credit card companies send out various offers to consumers hoping to get new card holders. They also send balance transfer offers to existing credit card holders, hoping to get their existing customers to transfer other debt to them, as well.
While a low interest or 0% interest balance transfer offer is a reasonable solution to consolidate higher interest debts, it’s important that you can either pay off the balances you transfer within the low APR/0% interest time period or you have another solution for when the promotion ends. Often, a balance transfer offer is only good for six months or a year – and if you haven’t paid off your balance before that time, you end up with a high interest rate on the remaining balance.
If you think you can swing from the balance-transfer vines for a few months, just make sure you formally close all your accounts yourself, and then notify the credit-card company to mark the account “closed at customer’s request.” “Otherwise, on your credit report, it will look like the creditor closed your account,” says David Mooney, PR director of Equifax, one of the biggest credit reporting agencies. Thus making you look like an even worse risk, even when you’re doing your best not to be.
Debt Consolidation Companies That Will “Do It All” For You
There are a number of debt consolidation companies that negotiate lower interest rates with your creditors for you. Sometimes they have a higher success rate than what you would have yourself if you called to try and get lower interest rates or better repayment options, but not always. Instead of using a debt consolidation company to take care of that for you without at least trying it for yourself, gives it a go on your own and sees if you can’t make arrangements with your creditors – you may be pleasantly surprised at the outcome.
In reality, many debt consolidators build in a fee as part of the monthly payment you make to them. It’s usually about 10% of the payment (i.e. about $50 on a $500 monthly payment). They pass along your payments to the creditor — some debit directly from your checking account — and get back a 10% to 15% slice that the relieved creditor is only too happy to rebate to the consolidator.
Here’s another risk with consolidators you should know about: they have been known, in some cases, to make late payments or even miss payments, thus worsening your plight (and your credit record).
While some debt consolidation programs really do help people, it’s important that you research and determine whether or not you must use a company or if you can improve your situation with some slight changes to your personal budget.
After I pointed out what is a debt consolidation loan I would like to point out why I believe that just as a loan by itself is not enough to get you back to your feet and move you in a position where you can be financially comfortable and become debt free and financially independent.
Debt consolidationgives you the sensation that you are “doing” something about the debt problem. The truth is the debt is still there, as are the habits that caused it – you just moved it! You can’t borrow your way out of debt. True debt help is not quick or easy. The biggest problem is not the debt itself but the symptom. We tend to overspend and we don’t acknowledge that tomorrow will come and we have to face the outcome of today’s choices we make. Saving is not as important as should be and we postpone starting investing for our future.
Debt consolidation by itself doesn’t work!
Statistics provethat 78% of the time, after someone consolidates his credit card debt, the debt grows back. Why? He still doesn’t have a game plan to either pay cash or not buy at all. He also hasn’t saved for “life happens events” which will also become debt.
This statistics are real and makes you realize that Debt consolidation by itself is not working. Over 75 % of those who take out a home equity loan or other type of loan to pay off credit cards end up with the same (if not higher) debt load within two years.
Fact is you can’t borrow your way out of debt. But, if you want to roll the dice with your options: Home equity loan or line of credit: Home equity loans are often taken for a quick fix. This treats the symptoms, but does not cure the illness. Simply said, it pays the credit cards, but now you owe on the house for what, 20-30 years. The unsecured credit card/cards are now the home you raised your family in. Additionally, the debt you just paid off is now in good standing with your bank, and like most you’re going to continue spending on these cards. This is where it gets dangerous, and about 80% of all consumers will fail here and double their debt.
The Only Way to Get Out of Debt: Total Debt Elimination
Related posts:
- Debt Consolidation vs. Debt Elimination
- How To Get Out of Debt?
- Getting Your Finances in Order Before the Holidays
- Debt Elimination
- Holiday Spending – without Holiday Debt.
- Pay Your Credit Card Balance in Full
- Manage Debt Before It Manages You!
Comments