When Should You Use Debt Consolidation?

June 30, 2009 by  Filed under: Debt 

Debt consolidation is considered the best and preferred solution to debt problems; the process is quite simple and involves consolidating multiple debt payments into one single payment.

Debt consolidation is the best way to avoid filing for an unnecessary bankruptcy and will speed up the process of debt elimination. Also, by consolidating all your bills into a single bill you will benefit from the lack of confusion that many different accounts can bring, not to mention reducing your stress levels.

The burden of debt can weigh very heavily, especially if the interest rates on credit cards and personal loans mean that you are paying far too much in the way of interest and therefore making very little impact on the principle.

A debt consolidation loan will stop this, as they will usually have a much lower interest rate and a greater percentage of what you repay each month will go towards paying off the principle.

Before you start to make any hasty loan applications you must first understand your situation exactly. Thoroughly assess your income and expenses and make a complete list.

  1. Start by making a list of your total household income.
  2. Then list all of your fixed expenses such as your home loan, auto loan, insurances etc.
  3. Then list variable expenses such as entertainment, groceries, gas and clothing etc.

You should be able to find a budget sheet online or at your local library that will make this task a whole lot easier.

The whole point of doing this is to find ways of managing your money better by finding areas where you may be overspending and then cutting back also it is always worthwhile shopping around for cheaper alternatives on things like car and home insurance if you feel you are paying too much for them.

If you are unable to cut back enough to make any impression upon your finances then it is time to seriously consider looking at debt consolidation.

Debt consolidation loans are offered by credit counseling agencies that will have debt consolidators who will work on your behalf to lower your debt and make it more manageable. They will work with you, using the information you have collated, to create a debt management plan.

The consolidator will then discuss your situation with your creditors and enter into a negotiation period with them with the aim of reducing or eliminating interest on your outstanding debt.

Once this process is completed you will see a marked improvement and at this stage you have one of two options available to you;

  1. You can continue to pay off your debt at the new repayment levels or,
  2. You can ask the consolidator to seek out a debt consolidation loan to pay off your remaining balances.

The debt consolidation loan that you will normally have lined up for you will normally be a home equity loan which will be secured against your property.

The main benefit of this type of loan is that the interest rate is extremely low and will therefore result in a much lower monthly payment.

Finally, when you begin to look for a debt consolidation agency, always look for those that are non profit organizations and that your interests are their priority as there are too many companies today that are out to scam you and if you end up with one of them, you will eventually find yourself in a far worse situation.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

You must be logged in to post a comment.

Prev Post:
Next Post: