6 Considerations Before Deciding to Consolidate Your Debt

Mountains of unsecured and growing debt can bring tons of anxiety and many sleepless nights. These days, those in the debt relief business are sending out offers to help by the gross to any name and address they can find. The reason is that there are so many families locked in serious financial struggles. Debt relief companies know that even the most outlandish offer will get a serious reading by someone. One of the most popular offers hitting mailboxes is debt consolidation.

Debt consolidation does not reduce or eliminate your debt.

When you consider any form of debt relief, it is critical to understand how it will affect your debt. Besides bankruptcy, there is no other debt relief that will remove all of your debt. Even bankruptcy can have limitations depending on your type and amount of debt. You will need a lawyer to sort out a bankruptcy claim if you choose to head down that road.

Companies that offer debt consolidation are not always open about exactly how you will benefit.

Many times, the main benefit from a debt consolidation goes to the institution that consolidates the debt. This company will be making you a large high interest loan in some cases. They will offer to throw tens of thousands of dollars at your various credit cards to roll them into one large lump with a single payment. Before agreeing to this plan, make sure to read the fine print and loan terms.

You should get at least two benefits from a bill consolidation loan.

The first improvement that you should receive is a single payment each month. There are other ways to wrap up your debt into a single payment besides a consolidation loan. A debt management service will do this for you, too. The second plus is that you need to get a lower interest rate than the average interest rate you are currently paying to multiple debt holders. If you cannot improve your interest rate considerably, this particular debt consolidation may not be for you.

The best type of consolidation loan is usually one that is attached to a mortgage.

With real estate to back the loan, the interest rate will drop a great deal. You can turn those 25% rates into rates of less than 10% in most instances. If the consolidation loan is just another form of unsecured debt, you will probably see the rates go from 25% to 18% or so with conditions attached. Like the credit card companies, this interest rate may be flexible. This means that if you falter even once on the terms of the agreement, your interest rate and payment will balloon to possibly a greater amount than you paid previously.

Make sure that a consolidation loan is enough to make a real difference in your monthly expenses.

A 10 or 15 percent drop in interest on $20,000 or more can represent a real and helpful savings. You will pay less per month in payments, and pay off the debt at a more rapid pace. This is a win on both points. However, if you owe $50,000 and can only consolidate $20,000, you could end up in worse shape than before. Your debt has not been reduced. The lesser amount may not be enough to actually help your monthly cash flow with bulk of your debt still being linked to excessively high interest credit cards.

Always be sure that you can actually pay the new payments to service your debt.

If your income is always $500 per month short, unless you can reduce your monthly payments by at least that amount, you will still be in financial trouble. In fact, you need to have at least a small cushion between what you earn and what your monthly expenditures are to maintain your debt payments and cover emergencies without increasing debt.