Does Debt Consolidation Make Sense for You? | CreditScore.net

Debt consolidation might seem like the golden path to putting your debt problems behind you. But it?s not that simple.

Consolidating your debt can mean many different things with several implications. Before jumping into any consolidation plan, use these questions to determine if it?s the right step for you.

Can you use another method to pay off your debt?

Even if you?re paralyzed by a mound of debt, consolidating it isn?t the only option to get out of a big hole. Sometimes dealing with debts separately is the most simple option.

If you?re discouraged by the number of different creditors you?re fielding phone calls from, consider taking on the debt snowball approach to paying off each account. This method means that you simply order your debts in order of increasing principal balance and start by paying off the lowest balance completely first while paying only the minimum on all other accounts. You may accrue more in interest while using this plan, but it can be a big psychological help if you?re having trouble coping with many different accounts.

Of course, you can always go with the money-saving option of paying off debt starting with the highest interest rate. Follow the same process as the debt snowball, but order your accounts from highest to lowest interest rates and start paying off from there.

No matter what you choose, try to stick to a system to take the guesswork out and make sure you?re handling the situation as effciently as possible.

Is your debt unsecured?

When you?re thinking about consolidating your debt, your options?and the pros and cons?vary depending on the source.

If your debt is from a credit card, student loans, or medical bills, it?s most likely unsecured debt. This means that you did not need collateral to back up the debt. This can be advantageous since you?re not risking other assets in the case that you default on your loans.

If you have these unsecured debts, be careful to understand the risks if you convert to secured debt, like a home equity line of credit (HELOC). A HELOC typically takes your house as collatoral, so if you stop paying your consolidated loan, you could lose your house or be sued by your creditor.

If you have student loans that are backed by the federal government, you?ll have your own set of options for consolidating these loans. This means that you can combine these loans and get an interest rate that?s a weighted average of all the loans. You won?t save any money since interest rates are simply an average, but managing your loans can be easier.

Are you getting a better deal?

Consolidating loans may reduce your payments up front. But realize that you?re often?extending?the term of your loan, meaning that you?ll be paying more money in the long run. If you feel you have no other options, this still might be better than defaulting.

To further ensure it makes financial sense, lock in a competitive interest rate. It can be confusing to understand what rate you?re actually paying, especially when advertisements might display lower rates than you?re actually able to qualify for. Make sure to ask all the questions before signing up for a loan you don?t understand.

Have you tried credit counseling first?

Speaking with a credit counselor doesn?t mean that you have to?consolidate?your debt. In fact, you might be able to work with a credit counselor to discuss alternative options that might be a better fit for you.

Some alternatives to consolidating with a HELOC include going on a debt management plan. With these plans, you don?t have to consolidate your loans into a secured loan like you do with a HELOC. Instead, you can consult with a qualified company that will work with your creditors. If your creditors agree to your plan, you?ll be able to make payments on an affordable monthly plan, with the payments being split amongst your debt holders.

If you?re not able to get on a debt management plan, you can consider trying debt settlement. This means that you?ll pay only a certain fraction of what you actually owe because you can?t afford to pay the whole amount back. While you won?t have to pay your whole debt, your credit will take a hit. Plus, it?s always possible that your creditors won?t agree to this plan. You must proceed with caution as there are many companies out there that may promise something that?s too good to be true.

Finally,?bankruptcy?might be seen as a last resort. While it might not be preferable or possible in all cases, it may be the right choice in certain situations.

Are you sure it will solve your problems?

Don?t forget that finding a way to deal with your debt now doesn?t mean it won?t ever be a problem again. It?s possible that poor financial?decisions?you made in the past resulted in some of the debt that you ended up with.

It?s time to start thinking about how you ended up in debt in the past and how to correct it going forward. This could include gaining a better understanding of how credit works, setting up a budgeting plan, and creating an emergency fund for unexpected situations.

Categories: Debt

Jeffrey Trull is a freelance writer and blogger with a passion for helping others pay down debt, save money, and spend on things they love. With two degrees in engineering, he has always had a passion for working with numbers. Jeffrey recently celebrated becoming debt-free in 2011, and he encourages others on their journey to do the same. Inspired by Get Rich Slowly and I Will Teach You to Be Rich, Jeffrey writes on his own personal finance blog, Money Spruce. In his spare time, he enjoys traveling and biking around his home in New Haven, Connecticut.

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