If you often are late in paying bills, and are paying high late fees and interest charges, you may be looking at some form of debt relief. Debt consolidation might be an option. Before you take the leap though, take the time to understand what it really is, and for whom it is best suited.
Essentially, debt consolidation combines all of your debts into one loan so you owe only one creditor. Debt consolidation does not solely refer to services that offer this. It just means getting all debts “under one roof” and at a good interest rate. Debt consolidation can simplify bill paying because it results in just one payment.
One of the ways involves working with a debt consolidation firm. But individuals can consolidate their debts on their own too, and pay off debt. While pros and cons exist for each, some of the ways include: borrowing from a 401k or other employer-sponsored retirement account to pay off debt; borrowing money from a life insurance policy; borrowing from family or friends; a personal or signature loan; a title loan on a vehicle.
Some people consider refinancing their home and taking cash out at closing, or taking out a home equity loan or line of credit. Others consider balance transfers, or transferring credit card balances due to a new card with a lower interest rate.
Debt consolidation services ask consumers to make one monthly payment, which then is used to pay creditors. Consumers pay back 100% of the debt, plus interest. If the problem is too many accounts with too-high minimum payments at crippling interest rates, these services may offer a solution. They can be helpful to people who are sure they can change their habits, so that they can focus on just one interest rate and one payment.
Debt consolidation is best suited for people who are able to pay bills, but are having a hard time juggling multiple bills or remembering payment due dates. For those finding it hard to pay bills at all, or who have bad credit, many debt consolidation options may not be the best ones for you.
Debt consolidation can simplify on-time payments for some people. But it does not address issues like overspending and poor budgeting – which, for many people, created the problem in the first place. If you choose debt consolidation, you must also commit to changing your spending and saving habits. Otherwise, you risk a vicious circle of increasing your debt instead of eliminating it.
Debt consolidation services combine all debts into one loan, which then often is secured by the borrower's property, such as a home or car. This action puts those items at risk if the borrower cannot pay. In addition, fees for these services can be high. Some debt consolidation firms have poor histories and reputations.
Keep in mind that it’s not only just debt consolidation services that carry risk. Besides refinancing or home equity line of credit risks discussed in before, balance-transfer card offers come with fees and other terms. With a title loan comes the risk of losing your vehicle should you be unable to pay. If you do not pay back money you borrow against a life insurance policy, that amount will be deduced from the amount paid to your beneficiaries.
Borrowing from a 401k or other employer-sponsored retirement account should be a last resort since you are taking money from your retirement years. You may also realize significant tax implications. And if you leave the job associated with the account, the loan will be due immediately. Associated problems with borrowing from family or friends include the potential for damaged personal relationships, the expectation of a return of the favor years down the road, and possible legal action against you by someone who was previously a good friend or close family member.
A debt consolidation loan – whether from a debt consolidation service or other – may lower your payment by spreading out the time to repay the loan. This might sound good initially. But this means that you could pay more interest over the life of the loan – even with a lower interest rate and lower payments than when you began. You also could face expensive penalties and see your interest rate rise if you miss a payment, or are late with one.
Debt consolidation is not the same thing as debt settlement, or debt management plans and credit counseling – other options that can help individuals in severe debt. Individuals need to weigh the pros and cons of each option against their own situation in deciding which direction to go.
You’ll still have your full debt to pay, and you’ll require diligence and perseverance to pay off in full. Debt consolidation is not the solution for someone struggling to pay even minimum payments on bills.
With debt consolidation, you may be able to simplify on-time payments. But remember that it does not address the need to look at the root problem. It will be important to make a commitment to turning over a new leaf and changing your spending and saving habits.
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