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