If you are wondering if you should consolidate debts as a possible debt solution, it is important that you understand the options available.
Consolidation involves combining multiple debts into a single monthly payment, making it easier and more affordable for you to meet your financial obligations.
Consolidating debt is one of many ways you can repair your credit. Companies like Sky Blue Credit have been doing this for a quarter of a decade now.
Typically, you are not reducing the amount of debt that you owe, but rather reducing interest rates and extending terms to make the monthly payments more manageable. Over the long-term, this method may help improve your credit score because you will be able to make payments on time.
For you to consolidate debts, the debts have to be unsecured debts such as medical bills, credit lines, credit cards, unsecured personal loans, etc.. Any debt secured by collateral will not usually qualify since the lender can re-possess the asset in the case of delinquency.
When you consolidate debts, it can be a good way to avoid bankruptcy, however it is not for everyone.
If all of this sounds too complicated for you, credit repair companies such as Lexington Law and CreditRepair.com have mastered this process.
You need to look at the various consolidation methods and decide if this solution is the best answer for your particular financial situation.
Methods of Consolidating
Basically, there are two methods to consolidate debts: refinancing, or debt management / credit counseling plans. The main difference is that one is a loan and the other is not, which can be an important factor in your decision, especially if you have a lower credit score.
Borrowing For Debt Consolidation
This method of debt consolidation involves refinancing your current debt with another loan that will allow you to make a single payment to one institution rather than several payment to a number of different lenders. There are a few refinancing options available, all offering their own set of advantages and disadvantages. Before committing to any consolidation plan, make sure you consider all the facts carefully.
1. Home Equity Line Of Credit. You will usually be able to secure a better financing rate, and any interest paid may be a tax deduction since the loan is connected to your home mortgage. However, with a line of credit, funds will continue to be available as you pay down the balance owing. So, if you have problems dealing with credit responsibly, this may not be the best solution.
2. Low Interest or 0% Credit Card. If you have balances owing on several cards, you can apply for a low rate or 0% interest card and combine all your debts onto one card. This is a great way to cut down on interest payments; however, it will only work if your balances are small enough to move to one card. Also, many credit card companies have limited offers, with the low interest rate being available for 6-12 months only. Make sure to ask what the standard interest rate will be in case you are unable to pay the balance off during the specified low interest period. And of course, for this method to be effective, you must avoid accumulating additional balances on the emptied cards.
3. Loan/Mortgage. The third method of debt refinancing is a debt consolidation loan. If you have a small amount of debt and a good credit score, you may be able to obtain an unsecured loan. However, most lenders will require the loan be secured with collateral, which is most often your home, vehicle, or other piece of property. You will generally be able to get lower payments and interest rates, but you could lose your home or property if you default on the loan. By taking out one larger loan, you will be able to combine a lot of smaller debts, not only reducing your total monthly output but also decreasing the amount of interest paid.
If the lender you are working with also holds your mortgage and you have enough equity in your home, you may qualify for a home equity loan or a second mortgage. In these cases, you may be able to secure an even better rate and the interest paid will be tax deductible.
Debt Consolidation Services
This option is frequently seen as either credit counseling (see below for more detail) or debt negotiation/settlement. Sometimes with a loan, you can get overextended or not be able to meet your loan/mortgage obligation. Then you risk losing any property that was secured by the loan.
With settlement, you don’t lose secured properly unless you default on the initial loan obligation. But you also need to negotiate (or have a specialist negotiate for you) payments you CAN afford to make and continue making.
Yes, your credit may well be either shot, or on its way to being shot, but you can rebuild it once you get through the process. If, however, you are not patient enough to work through the consolidation process, and you qualify for bankruptcy liquidation, then do consider bankruptcy as an option.
After living off of my credit cards for about a year and a half, I had run up around $30,000 in debt. Eventually I ran out of credit and did a debt consolidation. It didn’t really help.I ended up filing for bankruptcy anyway. Now, if anyone asks me if they should do a consolidation, I tell them they might as well go into bankruptcy.
You’re credit rating is shot by that point anyway so you may as well just dump it all and start over. Mine was all unsecured credit card debt, however, it may be a different story if you’re dealing with a mortgage or car payments or student loans.
Above you see what Mark told us, but Terry had a completely different experience:
This was a solution that seriously saved my life when I had a problem with overwhelming debt.I took loans from different banks for different purposes at different rates of interest. The rate of interest varied depending on the purpose for which I’d borrowed the money. Personal loans had the highest rates.
Heavy interest rates were hard for me to afford as time passed and expenditures increased. It was my wife who told me to check out debt consolidation. I felt it could be very useful in my current situation.
I then searched for a debt consolidation company. I found a good one friends had recommended, and in no time I started on the plan.
So now I’m relieved from huge installments. So for all those who have these kinds of problems, I recommend debt consolidation. It helped me and could help you a lot, too.
Consumer Credit Counseling
This method doesn’t need you to qualify for a loan or remortgage. CCCS will add up all your qualified debts and calculate how much you need to pay monthly. You pay them, they pay your creditors.
In some cases they can eliminate added fees the creditor charged; get the interest rates reduced and can help stop creditors from contacting you. A debt management plan can help you get out of debt and most CCCS branches also offer money management classes to help keep you out of debt.
Making The Choice
We can’t tell you which is right for you since we don’t know your personal financial situation. Take some time to create a budget, list your assets, income, debts, etc. and learn more about credit repair services to find out which is best for you.