Today's financial state has made people more aware of their financial situation, but not many are informed of their financial options. If you are drowning in debt from school, your credit cards and life in general, then debt consolidation may be a viable financial option.
What Is Debt Consolidation?
Debt consolidation is the process of taking out a new loan to pay off a group of other outstanding balances. In essence, it simplifies your debt by forming all your balance accounts into one big account. Debt consolidators will provide you with lower monthly payments than what you were paying before, and they will lower your interest rates so that you can pay everything off over a longer period of time.
How It Works
Debt consolidators will work on your behalf with your other debt companies to pay off your existing balances, relieving you of creditors and collection agencies. If you are in danger of bankruptcy, consolidators can sometimes purchase your credit balances at discounted costs, because the crediting companies want to be rid of the accounts before they lose money in a bankruptcy claim. The consolidators then subsidize or completely remove your existing interest rates, permitting you to start paying off your principal loan, as opposed to paying off your previous interest. In addition, any interest that you do pay to the firms for their consolidation loan will be tax deductible.
However, debt consolidation has rules and restrictions, and all consolidation firms work differently. Before signing any paperwork, read all the fine print of your contract. Some firms are notorious for charging you an additional percentage of your debt amount, up to 20 percent, without ever informing you verbally. Also, many consolidation loans will charge you extra if you choose to pay off your loan sooner than expected. The long-period payoff plan is a consolidation firm's way of making money -- they profit off interest that builds over time -- so weigh your options carefully. If you can afford to pay off your loans separately without consolidating, then you will save money in the long run by doing just that. Consolidation loans tend to rack up balances in interest rates.
Also, if you are in extremely large amounts of debt, to the point where bankruptcy is likely, weigh your decision to consolidate carefully. Consolidated loans are not always eligible for discharge upon bankruptcy, and this negatively affects your ability to actually get out of debt, should you eventually file for bankruptcy. Debt counseling is widely available, so seek an outside professional opinion if you're unsure of how to proceed. However, be wary of counselors who work for large banks or financial firms, as they will likely be conflicted by their interest for their company. Seek independent counseling if possible. You can also look for companies who offer free debt consolidation information and who encourage you to avoid late payment fees, bankruptcy and sometimes even consolidation itself.
Types of Debt Consolidation
Unsecured consolidation loan: Unsecured consolidation loans have higher interest rates than others, but if your existing debt is mostly with credit card companies and other high-interest industries, an unsecured loan may be a risk-free way of consolidating. Also, you have to qualify for an unsecured loan, so if your credit is already bad, you may have difficulty consolidating this way.
Secured consolidation loan: Secured consolidation loans have much lower interest rates than unsecured loans, but they require some sort of collateral on behalf of the debtor. This collateral is usually a high-value item, such as a car or a house. For this reason, debtors with secured loans risk losing their large assets, should they be unable to pay off the consolidation payments at any time. However, secured loans do not require good credit history.
So It's Time To Consolidate
Consolidation is smartest at the beginning signs of debt problems. It is better to get out of financial difficulty as early as possible, instead of struggling to barely stay above water. The cost of debt consolidation varies from firm to firm, so shop around before settling. Again, many fraudulent or conniving companies exist today, particularly in the current economic climate, when people are most vulnerable. Ensure that your consolidation company is reliable and certified. If you're unsure, look for seasoned debt counselors, who are often more experienced with one-on-one customer interactions and who can work with you on a personal basis. In the end, it's all about accommodating you, so know your needs and stick to them.