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Debt Consolidation: Should you consider a consolidation of your debt?

 
 

Debt consolidation means obtaining a loan to consolidate other debts.

debt consolidation 

In a typical debt consolidation, your high interest rate debt is consolidated into a larger loan, at a lower interest rate.

Debt consolidation loans are most often used to consolidate high interest rate debts, like credit cards, into a lower rate loan.

For example, if you owe $18,000 on four credit cards, you could go to the bank and get a debt consolidation loan for $18,000 so you can pay off all of your credit cards. This is called a credit card debt consolidation.

There are two big advantages to getting a debt consolidation loan.

First, you now only have one monthly payment, instead of payments on more than one credit card, so it's easier to manage your budget.

 

Second, loans normally carry a lower interest rate than credit cards, so the consolidation of your debt reduces the interest rates you are paying, allowing you to repay your debts faster.

A debt consolidation loan is a great way to consolidate your debt into one monthly payment, but it only makes sense if you can afford to make the payments. Going from four payments of $200 each to one payment of $600 each may sound like a good idea, but if you can't afford the $600 payment, a debt consolidation loan may not be the correct answer.

You should beware of a Debt Consolidator who promises a deal that seems to good to be true, because it probably is. Some Debt Consolidation Programs are legitimate, but again, be careful that you do not enter into a plan that you can't afford.

The worst offenders tend to be Bad Credit Debt Consolidation lenders that promise you a loan, even though you have bad credit, charge you an upfront fee, and then tell you that you have been declined. They keep your fee, and you don't get your loan.

If you have the ability to repay, a debt consolidation loan is a good idea, as long as you have reviewed your budget and know that you can make the payments.

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