Debt Consolidation

When Should I Consider Debt Consolidation?

You can’t keep up with your payments anymore and feel overwhelmed by financial stress. You feel like you have to try to cheat the system just to keep up with your living expenses. You are taking evasive action with your money, such as taking out payday loans, pawning valuables, or opening new lines of credit because you’ve already reached your limit on credit cards. When all these problems have been set in motion, and sometimes others —it’s time to meet with a credit counselor and consider your options.

One such option for those who are deep in consumer debt is “debt consolidation”, which effectively means taking out another type of loan to repay multiple debts in a single consolidated payment. Paying in this manner allows you to lower your monthly payment, and sometimes to pay back a reduced amount. It also focuses the attention of your debt on a single creditor, which can greatly simplify how you deal with managing your money.

Usually debt consolidation will also involve some personal budgeting. It’s a great solution for many people, but it isn’t necessarily the only solution. It takes work and discipline, just like most options for getting out of debt. If you’ve begun to consider bankruptcy and don’t know what else to do, debt consolidation can offer an alternative that won’t be as damaging to your credit.

How Does Debt Consolidation Work?

Debt consolidation involves using a new loan, often a second mortgage or some other type of loan, to pay off several or many other loans. One reason to do it is to have one simple payment, but the main reason is to get a lower fixed interest rate and sometimes a lesser payment amount. Your new combined monthly payment will be lower than your previous combined payment, making it easier to handle each month, and freeing up cash flow for your necessary living expenses.

Sometimes it can take a little more time to pay back a consolidated loan, but it allows you to avoid declaring bankruptcy and usually isn’t as damaging to your credit. It has advantages and disadvantages depending on your particular financial situation. There are also a few types of loans that can be used, each of which have their pros and cons.

What Are the Different Types of Debt Consolidation?

Debt consolidation can usually be divided into two types of new loans used to pay off your other debts: a secured loan and an unsecured loan.

A secured loan is a loan taken out using an asset as security or collateral for that loan. Sometimes it can be several assets. Usually it’s a house, which means either taking out another mortgage, refinancing an existing mortgage, or using home equity for a loan. Because the loan is secured against this asset, this approach to debt consolidation ensures the lowest interest rate. It also ensures you can get as much as you need to pay off the debts. The big risk with this type of secured loan is if you default, you could lose your home or other assets through a foreclosure.

The other main type of loan used for debt consolidation is an unsecured loan which doesn’t have an asset behind it. For this, you must be able to qualify, and often the amount you receive won’t be enough to fully pay off your debts. In addition, the interest rate will likely be much higher than it would for a secured loan. The risk, however, is considered to be less because if you default, you won’t lose your home.

Another possibility is for debt consolidation companies to discount your loan amount by buying it from the creditors, which is something worth shopping around for. It’s worth noting that debt consolidation can negatively impact your ability to discharge debts in bankruptcy, so it’s important to consider this decision carefully. Speaking with credit counselors or a debt consultant can provide more insight into the process and how it might work for you.

Head on over to Curadebt for a free, no obligation Debt Consultation.