The process of debt consolidation requires that you negotiate with your creditors so that they can allow you to pay a lump sum amount for all that you owe them. This amount is always lower than what you owe, but it can be a pretty large figure nonetheless.
As a result, some people decide to get loans to cover this lump-sum figure. These debt consolidation loans allow you to pay off all your creditors in one broad sweep and only have to deal with one large debt from one creditor.
On the surface it seems like a great idea, especially since the interest rates on these loans tend to be lower. So let’s take an in-depth look to see if it is the best way for you to get out of debt.
Bringing it all in
We get into debt by accumulating it from different creditors. Some debts are higher, others are lower and all the terms are different. With a debt consolidation loan, you amalgamate all these debts into one single loan.
The advantages here are obvious; you will only have one payment to make each month, so you will not have to worry about keeping track of all those bills with multiple dates and rates. It definitely makes life simpler in that way, and who wouldn’t want a little more simplicity in their life?
Lower monthly payments
One of the perks of debt consolidation loans is that they reduce your monthly payments along with the interest rates. This will give you some relief for a while, but experts advise that it may not be all good.
Lower payments and rates means you will be paying off that loan for quite a while, maybe even longer than you would have if you used another way to manage your debt. What you need to do is find out if the costs of using the consolidation loan will have you paying more than what you owed in your previous debts. If that is the case, negotiate with the institution providing the loan to see if you can make some adjustments, otherwise, it is not worth it.
Using your home’s equity
Using the equity on your house to take out this loan is regarded among the fastest way to get out of debt. The danger of this is that you may lose your house in the event that you can’t pay up. So, do you really want to put yourself and your family in that kind of danger?
If you decide to go this way, you need to read the terms carefully and be absolutely sure that you will be able to service this loan until you pay it off.
Bottom line: change your ways
While debt consolidation loans provide you with a quick way out of trouble, they will not keep you out of it. In order to stay out of debt, you need to take a good look at your lifestyle; your expenses, savings and income. Learn to buy only what you can afford and reserve credit cards for certain important payments. You may not be absolutely free of debt (it contributes to your credit score after all), but you should not find yourself in this position again.