Debt Consolidation 1.01
Before beginning debt consolidation, it is important that you understand what debt consolidation is all about. Debt consolidation makes sense when you owe debts to a number of different creditors and those debts are accruing interest at a rate higher than the overall market rate. The idea is to get all of your debts together and get a lower interest rate, which will then, presumably, lower your payment and allow you to pay off the debt more quickly.
Debt consolidation is not debt forgiveness. Debt consolidation does not have any beneficial effect on your principle balance. If you already know you owe more money than you can possibly repay, at any interest rate, debt consolidation is not for you.
What types of debt consolidation loans are there?
You have a number of different options for debt consolidation. If you own your own home, and you have equity available in that home, you may be able to repay high interest credit card debt through the use of a home equity loan. Using a home equity loan for debt consolidation may allow you to deduct from your taxable income the interest you pay on the debt, which is a very good thing. You will also have an opportunity to convert your high interest debt to a much lower interest rate that may (or may not) be fixed for the lifetime of the loan.
If you have no equity to draw on, you can consolidate your higher interest credit cards onto a lower interest rate credit card, but I would caution you to do this only in very limited circumstances. This type of debt consolidation is really not for people with large credit card balances, and I’ll tell you why. Consolidating large amounts of credit card debt on a single card leaves you at the mercy of that creditor. Not infrequently, people who attempt debt consolidation in this manner find themselves in more debt than they were in before they began and paying an even higher interest rate than they were. If you can not pay off the balance of the transferred debt within the introductory period of the new credit card, you should not pursue debt consolidation on a credit card.
If you can qualify for a personal loan, this might be an acceptable means of debt consolidation. However, if you do this, please read all of the fine print. Understand what your payments will be, how much interest you will be paying, when the loan will be repaid and what the overall cost of the debt will be. Above all, be sure you are dealing with a reputable lender.
Some types of debt have particular options for debt consolidation. For example, student loans can, and in my view, should be consolidated after a student finishes with school. Business owners should be aware that there is also such a thing as business debt consolidation.
Debt consolidation is often a good idea, but in order for it to be effective as a debt reduction tool, it must be part of an overall debt management plan.
