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Debt Consolidation Pros and Cons



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What is Debt Consolidation?

Debt consolidation simply means taking out one larger loan to pay off multiple smaller loans The goal is to get 1 monthly payment to replace multiple payments, get a lower interest rate, and lower monthly payment to make it worthwhile. The repayment period of the new loan will be longer.

If you have multiple debts, consolidation of debt could be a part of your debt solution possibilities. You can either take out a debt consolidation loan yourself, or sign up for a debt consolidation program. The services offered by debt consolidation companies differ from one to the other so check them out thoroughly. Debt consolidation can be done by consolidating your unsecured loans into another unsecured loan, however, most times a debt consolidation loan requires collateral. Making the loan a secured loan allows for a lower interest rate. The lower rate is because the bank or lender can sell the asset a person puts up against the loan in order to make their money back. Most often this collateral is a house or some type of owned property.

Do it Yourself Debt Consolidation

If you take out a consolidation loan yourself , you don't owe less money. You may get a lower interest rate but you still owe the money. That is one disadvantage to do it yourself debt consolidation; you end up paying more money in the long run if you don't know what you are doing. You get one monthly payment but now you have extended the loan, (i.e. added more time to pay it off). Consequently you have greatly increased the amount you have to pay as you are paying more interest on the extended consolidated loan.

You may not need a consolidation loan. Try to negotiate with the creditors yourself to reduce the interest rate and possibly the total amount of debt, ask to stretch out the payments (new payment plan - this costs more money in the long run),  pay off the biggest debt first and pay more than the minimum payment amount. Paying more than the minimum  is the only way you can save money in the long run. You will also save the money by not paying the monthly fess that consolidation companies charge.

If you do opt for a new consolidate loan, you can  get a lower rate if you  make the loan "secure" by putting up collateral.  If you default on the loan, you could lose any collateral that you put up to secure the loan.

Instead of a consolidation loan, try hard to make those payments and get rid of that debt sooner. If that is not possible, consolidation of your debt may be an option, but work as hard on changing your habits as you do on getting the best consolidation loan.


Debt Consolidation Companies

If you want to pay for convenience or just can't do it yourself then find a reputable debt consolidation company.  You send them one payment every month and the company will send the money to all your creditors. 

Find a debt consolidation service that can negotiate with creditors to eliminate or reduce the amount of accrued interest and penalties. When you default on any account, interest and financial charges are accrued. Consequently, the total debt amount continues to grow like a mushroom. A good debt consolidation program eliminates that portion of your total debt resulting in the reduced total debt amount. To get a lower 'rate you may have to make the loan "secure" by putting up collateral.


Advantages of a good debt consolidation program:

you get one monthly payment instead of several, it keeps creditors from harassing you

accrued interest and penalties can be eliminated

you can get a lower interest rate in some cases (if your credit isn't totally ruined)

you don't have to give up your credit cards, and can only include those that you want consolidated

if you take out an equity loan, the interest is tax deductible (discuss with a tax advisor)

won't hurt your credit score, in most cases

it will provide some much needed emotional stress relief

* Don't get into the habit of using these services all the time. If you aren't careful you could end up in a trap where you constantly have to refinance or consolidate your bills.

Disadvantages and risks:

You pay an additional monthly fee, about 10% of the monthly payment amount. However if the deal is done correctly, you could still save money even with the additional fees.  If you are already behind in payments, your credit score has probably been affected. Don't let debt consolidators entice you into an easy to get loan. If you are a credit risk your rates could be much higher, as much as 22%.

If you default on a secured loan, you could lose any collateral that you put up to secure the loan.

Beware that some bad debt consolidation services collect money from you but never pay the creditors, or they are late in making payments on your behalf ( this affects your credit score even more).

 When a company advertises free debt consolidation services; don't get misled by the word 'free'. These companies may claim to offer free services without any fees, but they usually make up for these free fees in your monthly payments. Just beware and do some research.

Ask them about their fees, what they actually do for you, can they reduce the total debt and ask about their success rate. Is the staff knowledgeable? Are you comfortable with the way they answer the questions? 

 They will also be asking you many questions regarding your private financial data such as what type of rates are you looking for, what type of financial help do you need and will you need assistance with creditors or bank loan officers.  Be prepared.

Check the report of the company you are going to deal with. Two resources are the Better Business Bureau and Office of the Attorney General of your state.  



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