Debt Consolidation: Is It The Right Choice For You?

By Author: ben austen
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With more and more families struggling to pay down credit card debt there has been a rise in the number of options for consolidating debt under one loan.

But experts agree, while there is a much higher number of banks and credit unions ready to offer you debt consolidation loans to help you combine multiple credit card payments into one manageable payment, there are precautions everyone should be taking before they take advantage of this option.

Debt consolidation loans are set up to help folks recover from too much credit card debt on their credit reports. This is a good thing, however not everyone actually benefits with any real significance under a debt consolidation loan. In fact, in some cases, consolidation can actually create longer debt scenarios for some.

Here are some issues to consider before you decide to consolidate:

A debt consolidation loan may be the right option for someone to consider if they are having difficulty keeping up with multiple monthly payments, due to loss of income or other unforeseen financial hardships. Many people making the minimum payments ...
... each month are barely scratching the surface on their principal and, meanwhile the debt grows.

The advantages to consolidation can help if consolidation involves altering any unsecured debts into secured debts, which should provide an opportunity for the borrower to lock in the loan at lower interest rates than they may be currently paying.

Paying down debt as opposed to just interest means you clear the debt faster and your credit history shows pay down activity, which makes you more credit worthy on paper. There is also the added benefit of having to pay only one creditor instead of several.

Now for the flip side: It’s important to keep in mind that any unsecured debt consolidation loans may involve a longer repayment terms, which means that over the life of a new loan, even with a lower interest rate, you could end up paying more than you would have under the original loan. So, it should be quite obvious that is critical to keep track of current interest rates and loan fees to determine what the overall cost of the consolidation loan will be over time.

Here’s another important issue to think of as well. Many debt consolidators out there are asking for collateral, such as homes, cars and other assets. Tread cautiously here and make sure you are not putting your family’s home at risk for the sake of a loan that may or may not get you out of debt any faster had you stuck to the original loan terms.

Anyone with a good credit score can likely find themselves very easily qualifying for a debt consolidation loan, or a loan based on their debt to income ratio. A good income to debt ratios tells a lender that you are likely going to be able to cover your monthly expenses with your current income and are a good prospect for repaying a consolidation loan back. Typically, lenders like to see a debt to income ratio of just over 35%.

On the other hand, getting approval for a debt consolidation loan can be problematic if your debt and income levels are out of this range and if there is a history of missed payments or defaults on previous loans.

As an alternative to a consolidation loan, someone with poor credit history may want to consider a debt management plan that, while not a loan per se, offers a way to combine all your monthly credit card payments into one monthly payment. Typically the debt management or credit counseling agency will work with your creditors to come to an agreement on what an acceptable monthly payment to them would be and they disburse those payments out of your monthly payment into your debt management plan.

In short, as with any loan, do your research. Compare loan rates and fees and check their customer service backgrounds before you sign on for something that may or may not bring you the resolution to your debt issues. Then, before you agree to a consolidation loan, read through the agreement carefully and make sure you have evaluated it completely before signing.

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