Is Debt Consolidation the Solution to Your Debt Trouble

Dealing with debt can be difficult. The larger the amount of debt the more difficult it gets to manage it. Suffering under the burden of borrowed money and not being able to pay off your lenders means that you stand to damage your credit rating in one way or the other.  If you are like many people looking for a solution for getting out of debt without damaging your credit rating too much then debt consolidation is one of the solutions that might have occurred to you.  Here we will talk about some of the advantages and disadvantages of debt consolidation and whether it is the right solution to your problem.

Let us do a quick recap Of what debt consolidation is.  Debt consolidation is the process by which different debts are brought under one single debt.  Consolidating debts is usually done by taking out one single loan that is large enough to pay off all your current loans. Once this is done you only have the one single loan to make the payment towards every month. Not all methods of debt consolidation require you to take out a separate loan in order to consolidate your debts.  For example if you have a balance on several credit cards you can transfer these balances on to one single credit card that has enough credit limit to support the additional load. A balance transfer of this kind is usually made on a credit card that has the lowest rate of interest.  Other methods of consolidating debt is by combining unsecured debt or revolving debt like a credit card with a mortgage loan, taking out a second mortgage or home equity loan. The debt management services offered by a credit counseling service is also akin to debt consolidation since the main purpose of debt consolidation is to combine all your debts into one single loan, preferably at a lower rate of interest.

Advantages of Debt Consolidation

Lower monthly payments. A debt consolidation plan aims to lower your monthly payments in two ways. A debt consolidation usually stretches the tenure of the repayment term that automatically reduces the amount to be paid every month.  Secondly, people aim for a lower rate of interest on a debt consolidation loan or credit card when consolidating their debts.  This in turn also reduces the monthly payment.  It should be duly noted that while the monthly payment reduces the overall amount to be paid maybe higher due to the longer term of the loan.

Easier to manage Debt. When you consolidate all your debts under a single umbrella you are only required to make one single payment at a fixed date in a month rather than having to divide your payments amongst several separate bills. Just the fact that you do not have to deal with separate bills and different due dates and making tedious calculation is every month makes paying off your debts and easier process.

Disadvantages of Debt Consolidation

Your Other Assets May Be at Risk. A credit card company cannot collect on your assets like home automobile if you do not pay off the balance.  But when you take out a debt consolidation loan in order to pay off your credit card debts then your home or automobile may be on the line.  This is because a debt consolidation loan is usually a secured loan that a lender gives only when the borrower provides an asset like home or automobile as a collateral. If you are unable to follow through with the payments on your debt consolidation loan then the lender may use repossession or foreclosure as a means of recovering his money.

You May End up Paying More Money. While the debt management program reduces the burden on your monthly payments the overall amount that you pay during the tenure of the debt consolidation loan may be much higher.  This is simply because the tenure of a debt consolidation is usually stretched out over a longer period of time in order to reduce the monthly payments.

Difficulty in Getting a Debt Consolidation Loan. If your credit rating has suffered damage due to your debt problem already then you may find it difficult to get a debt consolidation loan unless you provide a strong asset as a collateral. Combining your credit card debt with your mortgage or taking out a second mortgage on your home may also prove to be difficult if there is negative information on your credit report owing to nonpayments of your debts. In several cases you may need someone with good credit credentials and financial backing to cosigned with you on the debt consolidation loan.

Is Debt Consolidation the Solution

Debt consolidation can make sense to you if it allows you pay off your debts at a low cost. Debt consolidation loans and services can be sought out from various sources. In the next article we will discuss where all you should look when looking to consolidate your debts.
The debt consolidation may make sense view if it is the only solution that allows you to stay afloat and keep a semblance of your credit rating without using other dire methods like filing for bankruptcy.
Take a closer look at the advantages and the disadvantages of debt consolidation.  It is important to not in danger your and other peoples assets.
Remember that while debt consolidation makes the burden of debt seem lighter it does not actually make the debt go away.  Though it may feel like you have more money available to you every month owing to the smaller payments that you have to make, resist the urge to spend and accrue further credit.
This is especially true sense debt consolidation only addresses the symptom and does not make underlying issues go away.  If the reason why you are facing a debt problem is mismanagement of funds and their responsible handling of credit then you should consider participating in credit education workshops or a session with a credit counselling service in order to bring about the required changes in your spending habits and lifestyle.