Debt is a fearsome presence in many people's lives, especially in a tough economy. As creditors tighten the noose by charging higher interest rates and ramping up minimum payments, it becomes more difficult to get out of debt. For many, debt consolidation is a real solution that can help them pay off debt faster by lowering their payments. There are a few things to keep in mind when considering debt consolidation.
Definition
Debt consolidation is the bundling of several payments into a single, typically lower, payment. There are two ways to do this. One is to incorporate all your payments into a single loan that pays off the outstanding balances. The other is to go through a debt consolidation or credit counseling service. You then pay the service one monthly payment, which they distribute for you.
Loans
The first option---taking out a loan---is a solid option for those who either own a home they have equity in or who have good credit. If you own a home with available equity, you can take out a home equity loan or incorporate the payoff of debt into a refinanced mortgage. If you have good credit, you may be able to ask your bank for a personal loan that will cover their debt. The benefit of these loans is that they are typically available at much lower interest payments than the credit card and other debt they would be paying off, saving you money each month. An additional bonus is that the interest on home equity and refinanced mortgages is tax-deductible, which provides an additional savings.
Services
Debt consolidation or credit counseling services are solid options for those who do not own a home or have credit issues that would prevent them from qualifying for a loan. These services negotiate better terms with your creditors, such as lower interest rates, lower payments or an extended payment period, which they get in return for assuring the creditors that they will get their payments on time. To ensure your cooperation with the negotiated payment schedule, you send a payment that covers all the negotiated payment plus a small monthly fee to the service. They then make the on-time payments for you on your behalf. These payments are typically lower than the combined original payments due to the service's negotiations.
Warning
Debt consolidation is not a good option for everyone. The main danger of debt consolidation is that many who follow this path end up in even more debt because they did not change the habits that got them into debt in the first place. Once the credit cards are paid off by a loan, it is all too easy to run them up again. For debt consolidation to be effective, it must be part of a long-term change in financial habits and responsible debt behavior. A credit counseling service or professional financial advisor can help with establishing new, healthier financial habits that keep you out of debt for good.
0 comments:
Post a Comment