Debt Consolidation - Bill Consolidation (25912)

Protected by Copyscape Originality Checker

Debt consolidation involves taking out a loan to pay off multiple loans. The reasoning behind it is that you can make one lower monthly payment, often with lower interest. The idea of not having to deal with multiple creditors is appealing to most consumers. Nonetheless, in view of the many debt consolidation horror stories, you may wonder whether debt consolidation is the best debt management approach.

Reasons Why Debt Consolidation Programs Often Fail

  • If you choose to incurr additional debt after consolidationg your bills, the program will fail. Moreover, although you may have one manageable monthly payment, you are still in debt.
  • Unless you change your spending habits, you would still have the same behaviour that lead getting into debt in the first place. For instance, 78 percent of consumers who participate in a debt-consolidation program continue to borrow, according to Dave Ramsey’s website. The reason? The person has not developed a cash-only plan, meaning that you only buy if you can pay cash.
  • Another reason why debt consolidation may not be the answer to your financial problems is the lack of an emergency fund. Unless you save for those unexpected eventualities, when they do occur, you will most likely resort to credit cards or other borrowing methods.

Consolidation Loans

If you’re considering debt consolidation, it’s probably because your debt has become unmanageable and you have missed payments. Under such circumstances, you are most likely a high-credit risk. Any lender who offers to consolidate your bills will likely charge high interest rates, possibly in the 21-23 percent range. Although such loans may allow you to make one monthly payment, you could end up paying more in the long run.

Home Equity Debt-Consolidation Loan

Home equity and cash-out loans are other common approaches to debt consolidation. However, keep in mind that your home becomes collateral for these type of loans. If anything unexpected happens, such as you lose your job or can’t work due to an accident, you could lose your home. In view of this scenario, you have to wonder if debt consolidation through a home equity loan is the best answer to your problem.

Debt Consolidation Services

Debt consolidation infomercials strive to lure you with promises to take care of all your credit problems. All you need to do is make one payment. The reason they are able to offer lower monthly payments is because they stretch out your payments and negotiate lower interest rates. Although this may sound like a smart thing to do, it means that you will be in debt longer, and you could end up paying more in the end.

Unfortunately, bill consolidators often neglect to inform you that your monthly payment generally includes a fee of about 10 percent. For instance, if you make a $300 monthly payment, the agency receives $30 from the creditor.

On the other hand, if you take the initiative to negotiate directly with your creditor, your entire monthly payment will go toward paying off your debt.

Balance Transfers and Debt Consolidation

Many consumers view low interest credit card transfers as another debt-consolidation option. However, such credit card offers are normally on an introductory basis. The first time you miss a payment or send it in late, the interest rates jump to 17 percent or higher.

Other Options to Debt-Consolidation

The secret to your financial problems, according to Dave Ramsey, is not debt consolidation but in making a budget and sticking to it. (For tips on how to make a budget, please refer to the resource section). Creating an emergency fund is also essential in order to pay off your creditors. Consider paying cash for things. If you have to borrow to buy something, you cannot afford it, and buying it will only make you poorer. Also, pay down your debt one by one. If you stop borrowing, getting rid of your creditors may be easier than you think.

In conclusion, whether you decide to pursue the services of a debt-consolidation company or not is your personal decision. However, if you’re equating debt consolidation with getting out of debt, you could end up disappointed. Keep in mind that lower monthly payments does not necessarily mean that you will save money in the end.

Copyright © 2011 Ana Jackson. All Rights Reserved. Reproduction in whole or in part constitutes plagiarism, is illegal and strictly prohibited.