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