| Sometimes people who have accumulated a | | | | Negotiate With Your Creditors - Sometimes your |
| significant amount of debt from a range of creditors | | | | creditors will offer you a lower interest rate, or will |
| will consider obtaining a "debt consolidation" loan, which | | | | waive certain fees associated with your accounts, if |
| will pay off most or all of their existing debt, and will | | | | you simply call them up and ask. This is most often |
| often result in a smaller monthly payment than they | | | | true of credit card companies. |
| were previously paying. While this can be a very good | | | | Debt Management - You may be better served by |
| idea for some debtors, particularly those who have a | | | | utilizing a debt management service. With a debt |
| lot of high-interest debts, it isn't always a good deal. | | | | management plan, you deposit an amount of money |
| Before you consider debt consolidation, you should | | | | each month with a service which pays your bills for |
| closely examine the proposal and make sure it is right | | | | you. Sometimes creditors will work with your debt |
| for you. | | | | management service to offer reduced interest rates |
| What Is Debt Consolidation | | | | or waive certain fees associated with your account. |
| A debt consolidation service provides a loan which | | | | Using a Traditional Lender - You may also be better |
| pays off some or all of your existing debt, and | | | | served by using a traditional lender, as opposed to a |
| replaces it with a single loan with a single payment. | | | | debt consolidation service. |
| The promise is to replace various high interest loans, | | | | Unsecured Loans - If your credit is relatively good and |
| such as credit card debt, with a single loan with a | | | | you are employed, you may be able to obtain an |
| lower total monthly payment. | | | | unsecured "personal" loan which you can use to pay |
| A related type of service is a debt management | | | | off some of your higher interest debt, such as your |
| service, which does not provide a consolidation loan, | | | | credit card debt. |
| but instead pays your various debts for you. | | | | Secured Loans - As many debt consolidation services |
| Is Debt Consolidation Right For You? | | | | will use your home as collateral, you may well be best |
| It may seem at first blush that there is no downside to | | | | served by refinancing your home or obtaining a home |
| debt consolidation - you end up with a lower monthly | | | | equity loan, and using the proceeds to pay off your |
| payment and have more cash on hand at the end of | | | | debts. |
| each month, while your debts are still being paid off. | | | | Bankruptcy - There is a possibility that your best option |
| However, depending upon how the consolidation loan is | | | | is to declare bankruptcy. If all consolidation will do is |
| structured, you may end up paying a lot more interest | | | | forestall an inevitable bankruptcy, consider whether |
| on your consolidated loan, and taking a great deal | | | | you will be better served by proceeding directly to |
| more time to pay off your debt, than if you keep | | | | bankruptcy. |
| paying your present individual debts. | | | | Buy Only What You Need |
| Additionally, there is a chance that obtaining a debt | | | | Some services promise not only to consolidate your |
| consolidation loan will hurt your credit. Depending upon | | | | debt, but also to provide you with insurance and |
| the scoring used, obtaining a new line of credit and | | | | perhaps even investments, while at the same time |
| paying off existing loans can result in your being | | | | lowering (or at least not raising) your total monthly |
| classified as a greater credit risk. | | | | payment. You should be wary of this type of service. |
| For people who are able, the best way to resolve | | | | First, the odds are that if you were in a good position |
| outstanding debt is often to pay more each month to | | | | to make additional investments, you would not be in |
| service their debt - focusing on paying down the | | | | the market for a debt consolidation loan. You will likely |
| principal of the highest interest debts with | | | | be better served by applying the "insurance" or |
| non-deductible interest (e.g., credit card debts). | | | | "investment" payments to your debt. |
| Finally, you must ask yourself if you will demonstrate | | | | Second, the commissions associated with investments |
| the fiscal discipline necessary to benefit from debt | | | | and insurance policies can be extremely high. Often |
| reconsolidation. If you obtain a consolidation loan with a | | | | the reason these services are trying to sell you |
| lower monthly payment, but immediately run up new | | | | additional products is so that the salesman can pocket |
| credit card debts, you will almost certainly end up in a | | | | an additional, substantial commission. |
| worse position than you were in prior to consolidating | | | | The best approach for most people who choose to |
| your debts. You can even end up in a cycle of | | | | consolidate their debt will be to obtain the best possible |
| obtaining "consolidation" loans, with the commissions, | | | | debt consolidation loan they can find, and to examine |
| fees, and interest rates accumulating to put you | | | | their other financial needs only after they have |
| deeper and deeper into debt. | | | | resolved their prior debt situation. Also, most people will |
| Big Commissions | | | | benefit from using a professional financial planner, as |
| It is not unusual for a debt consolidator to obtain a | | | | opposed to buying insurance or mutual funds through a |
| commission of 10% or more on your new loan. It is | | | | "debt consolidation" salesperson with little actual |
| possible also that the consolidator will be able to obtain | | | | knowledge of investment, and who offers a much |
| a rebate from your lenders when the new loan is | | | | smaller range of investment options. |
| applied to pay off those debts, resulting in an even | | | | Beware of Multilevel Schemes |
| greater commission. The chance for significant, easy | | | | There are some debt consolidation schemes that are |
| profits can inspire unethical debt consolidators to | | | | sold through multi-level marketing schemes. While there |
| encourage people to obtain consolidation loans which | | | | may be a certain comfort level in purchasing a financial |
| are not in their best financial interest. | | | | plan from a friend, co-worker, or relative, consider this: |
| Trading Early Payoff for Low Payments | | | | What are the odds that this person truly is an |
| In many cases, those seeking debt consolidation are | | | | investment professional? Most multi-level schemes |
| exploring that option because they are already | | | | offer very limited options to the customer, and all |
| experiencing difficulty making their payments. If so, the | | | | require very high commissions for the salesperson and |
| chances are that they will not qualify for a low interest | | | | the salesperson's "upstream" - those who sponsored |
| rate. If they obtain a higher interest consolidation loan, | | | | the salesperson into the organization. |
| any reduction in their monthly payments will likely result | | | | You should treat a multi-level program like any other |
| from the fact that the bulk of each payment is for | | | | option - see how it stacks up against your alternatives, |
| interest, with little going to the principal balance of the | | | | then select the one that is in your financial best interest. |
| loan. As a result, although their monthly payment is | | | | But don't be taken in by the fact that you like the |
| reduced, they will make very slow progress toward | | | | person who is selling the program, or the suggestion |
| paying off the loan, and they will likely pay a lot more | | | | that you will be doing them a favor - many of these |
| interest over the life of the loan. | | | | programs offer the "potential for six figure income", |
| Exploring Alternatives | | | | and your friend intends to profit handsomely by |
| Before you sign on for a "debt consolidation" loan, | | | | convincing you to sign up for their service. |
| consider your alternatives: | | | | |