Whether or not a debt consolidation can help you get out of debt depends on your individual circumstances. A consumer needs to realize that debt consolidation does not make the debt go way. You are only shifting to get from one place to the other. What you can hope to achieve with a debt consolidation is to reduce the amount that you need to pay every month towards all your debts. However, you should also expect to be making the payments in a debt consolidation plan for a longer period of time. The commonest way of consolidating and it is to take out a debt consolidation loans. People usually do this by taking out a home equity loans or second mortgage. Taking out a loan on the equity in the home or in equity line of credit in the home allows a higher credit limit with the lowest interest rates. Also, by extending the tenure of a loan monthly payments are reduced. While the new loan is used to pay off the existing debts, you now have the single new loans to make the payments on. There are a few things that you need to consider carefully in order to determine whether that consolidation will indeed help you get out of debt.
How does a debt consolidation loan work?
When you take out a debt consolidation loans you pay off the existing debts and credit card balances with the money that you receive from the new loans. After this you only need to make the payments on the new loan debt consolidation loans. If you have managed to get this loans at a low rate of interest which is usually the case with loans on home equity off loans against insurance policy, you will save money on the payment every month. Since the debt consolidation loans is usually a long-term loans, this helps in cutting down the monthly installments as well. It is possible to get an unsecured debt consolidation loans such as a personal loan as well. However, for this you will need to have a good credit rating. Also the personal loan will need to be considered carefully as the rate of interest is usually high.
Debt Consolidation May or May Not Be a Permanent Solution
That consolidation only addresses the symptoms and does not make underlying issues go away. That consolidation will ease the monthly burden of debt repayment surely. But if the reason behind your original debt burden was mismanaged finances and irresponsible handling of credit that it is quite possible that you might get yourself back into the same situation in a couple of years. Don’t let the relaxed pressure and more available cash float lull you into a false sense of security which makes you go ahead and borrow more money. Control your spending and avoid further credit until the time you have paid off the debt consolidation loan.
Changing Unsecured Debt into Security Debt
Generally a debt consolidation loans will require you to provide some security is a collateral. If you take out a loan on your home equity as a means to pay off your credit card debt then you are converting unsecured debts into secure debts. While credit card company cannot take away your home if you don’t pay them, when you use a line of credit in your home equity then the lender can use for closure in order to recover his money. This is the reason why changing unsecured debts into secure debts by using valuable assets as collateral needs to be thought about very carefully and only to be considered when you are very sure of completing the payments on that consolidation plans.
Will a Debt Consolidation Loan Save You Money?
There are two ways to look at this question. A debt consolidation loans doesn’t be save money on a monthly basis by reducing the installments that you need to make towards your debt. All your high interest rates will have been paid off and you will be left with a single and hopefully low interest rate that you will need to make the payment towards. Even if the interest rate is not much lesser than your previous debts debt consolidation loans usually has a longer tenure which automatically serves to reduce the amount of monthly installments.
However, since you are going to be paying this small installment for a longer period of time the overall amount that you pay may not be lesser than your original debt and in fact may be higher. One way to save money with a debt consolidation loans is to allow yourself to get back on your feet during the first few months of the loan and then once you have organized a finances better to attack it more aggressively and tried to pay it off as quickly as possible.
Alternatives to Debt Consolidation
The closest alternative to debt consolidation is debt management. A debt management plan is usually something that managed with the help of a credit counseling service. A debt management plan does not require you to take out a new loan to pay off your existing debt but involves negotiation by the credit counseling service with existing creditors to lower your current interest rates and allow better terms of repayment by waiver of financial charges, late fees etc.. Once an agreement has been reached between the credit counseling agency and you creditors you will continue to pay them off under the new terms of the loan through the credit counseling agency. Like debt consolidation you will be required to make one single lump sum payment to the credit counseling agency will then be responsible for dispersing it to you creditors.