Debt Consolidation Loan

Sometimes people who have accumulated aNegotiate With Your Creditors - Sometimes your
significant amount of debt from a range of creditorscreditors will offer you a lower interest rate, or will
will consider obtaining a "debt consolidation" loan, whichwaive certain fees associated with your accounts, if
will pay off most or all of their existing debt, and willyou simply call them up and ask. This is most often
often result in a smaller monthly payment than theytrue of credit card companies.
were previously paying. While this can be a very goodDebt Management - You may be better served by
idea for some debtors, particularly those who have autilizing 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 shouldeach month with a service which pays your bills for
closely examine the proposal and make sure it is rightyou. Sometimes creditors will work with your debt
for you.management service to offer reduced interest rates
What Is Debt Consolidationor waive certain fees associated with your account.
A debt consolidation service provides a loan whichUsing a Traditional Lender - You may also be better
pays off some or all of your existing debt, andserved 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 ayou 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 managementoff 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 toserved by refinancing your home or obtaining a home
debt consolidation - you end up with a lower monthlyequity loan, and using the proceeds to pay off your
payment and have more cash on hand at the end ofdebts.
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 isis to declare bankruptcy. If all consolidation will do is
structured, you may end up paying a lot more interestforestall an inevitable bankruptcy, consider whether
on your consolidated loan, and taking a great dealyou will be better served by proceeding directly to
more time to pay off your debt, than if you keepbankruptcy.
paying your present individual debts.Buy Only What You Need
Additionally, there is a chance that obtaining a debtSome services promise not only to consolidate your
consolidation loan will hurt your credit. Depending upondebt, but also to provide you with insurance and
the scoring used, obtaining a new line of credit andperhaps even investments, while at the same time
paying off existing loans can result in your beinglowering (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 resolveFirst, the odds are that if you were in a good position
outstanding debt is often to pay more each month toto make additional investments, you would not be in
service their debt - focusing on paying down thethe market for a debt consolidation loan. You will likely
principal of the highest interest debts withbe 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 demonstrateSecond, the commissions associated with investments
the fiscal discipline necessary to benefit from debtand insurance policies can be extremely high. Often
reconsolidation. If you obtain a consolidation loan with athe reason these services are trying to sell you
lower monthly payment, but immediately run up newadditional products is so that the salesman can pocket
credit card debts, you will almost certainly end up in aan additional, substantial commission.
worse position than you were in prior to consolidatingThe best approach for most people who choose to
your debts. You can even end up in a cycle ofconsolidate 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 youtheir other financial needs only after they have
deeper and deeper into debt.resolved their prior debt situation. Also, most people will
Big Commissionsbenefit from using a professional financial planner, as
It is not unusual for a debt consolidator to obtain aopposed 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 obtainknowledge of investment, and who offers a much
a rebate from your lenders when the new loan issmaller range of investment options.
applied to pay off those debts, resulting in an evenBeware of Multilevel Schemes
greater commission. The chance for significant, easyThere are some debt consolidation schemes that are
profits can inspire unethical debt consolidators tosold through multi-level marketing schemes. While there
encourage people to obtain consolidation loans whichmay 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 PaymentsWhat are the odds that this person truly is an
In many cases, those seeking debt consolidation areinvestment professional? Most multi-level schemes
exploring that option because they are alreadyoffer very limited options to the customer, and all
experiencing difficulty making their payments. If so, therequire very high commissions for the salesperson and
chances are that they will not qualify for a low interestthe 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 resultYou should treat a multi-level program like any other
from the fact that the bulk of each payment is foroption - see how it stacks up against your alternatives,
interest, with little going to the principal balance of thethen select the one that is in your financial best interest.
loan. As a result, although their monthly payment isBut don't be taken in by the fact that you like the
reduced, they will make very slow progress towardperson who is selling the program, or the suggestion
paying off the loan, and they will likely pay a lot morethat 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 Alternativesand 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: