Is Debt consolidation the right solution for you?

5 March 2010

Today’s post is a guest post by David Brown, a financial writer with Oak view law group

Have you been hit by the money bug? Are you suffocating under the burden of multiple debts? Well, debt consolidation can be one of your options. However, you need to know certain things before you decide to consolidate your debt. Read on to know more:

How can debt consolidation help me?

If you have a poor monthly income right now then debt consolidation provides you the option of making lower installments over a longer period of time. It might certainly suit your current financial condition

If you have several loans right now then you might be facing a tough time calculating interest rates. With debt consolidation you take a single loan to pay off all your debts. So you can manage your finances in a more organized manner.

You need not handle calls from the collection agency. The debt consolidation company does that for you.

What are the shortcomings of debt consolidation?

In most cases debt consolidation loans are secured loans. This means that you have to pledge some asset (your car or your home) as collateral for the loan. So you risk losing your assets in case you fail to pay back the loan. You should be confident about health, job and other unpredictable issues which can cause financial trouble. To be eligible for unsecured consolidation loans you must have a pretty good credit rating. Even if you manage to get a unsecured consolidation loan with a poor rating, it will probably not be big enough to pay all your debts.

Many people wrongly assume that all consolidation loans have low interest rates. However it’s a different story altogether. In most cases the payment is lower because of the extended term and not the interest rate. Secured consolidation loans sometimes have a low interest. But it can still cost you if you are taking a long term loan, say for 30 years. In such cases you have to pay interest for a long period of time and over the years the interest might grow even bigger than the original debt amount. Depending on your present debt, the interest rates for these consolidation loans can be more than those on the pre-existing debt. That is what makes debt consolidation a profitable business for your lenders.

Debt consolidation does not address the root cause of your debt-unwise money management. In most cases after someone consolidates his debt, it grows back. People have deceptive feeling that their debts have evaporated and they refuse to do away their poor financial habits. If you can’t spend less then there is no point in consolidating your debt.

Sometimes it can take a long time to get a consolidation plan approved by your debtors. Your accounts can go unpaid for that time. They will show as delinquency on your credit report. Sometimes a consolidation company can negotiate debt with your creditors to reduce the amount you have to pay. This again will affect your credit report.

Finally, if your financial condition is extremely critical then you might not be eligible for debt consolidation at all. With so much debt, you may be refused an additional loan.

Is debt consolidation an answer to your monetary problems? The answer to this question is different for everyone. Analyze your financial condition, consider the above things and then decide whether you really need to consolidate your debt or not.

Photo Credit: Photos8.com

Personal Finance And Investing

5 March 2010