Consolidating your debt

By Melissa Wirkus

If you feel like you are drowning in debt, with no help in sight, it is time to gather all of your bills and get yourself back on track.

There are actually a variety of debt consolidation plans available to consumers to provide relief from seemingly never ending debt.

Many of them involve taking out some sort of a consolidation loan, where all of your bills are lumped together into one big loan, and then you work to pay that one off.

An article posted on Debt-free-personal-finance.com, “Debt Consolidation,” lists the pros and cons of some of the most popular methods of debt consolidation.

“When it comes to debt consolidation some people dream of day when all their bills will disappear. Next to hitting the jackpot, a debt consolidation loan is some times the only way out for a debtor.”

Just be careful when choosing a debt consolidation loan, whichever type you choose, because there are a lot of predators in this industry.

“Just remember because it looks good doesn't mean it is. The advertisers now a days are pretty good about disguising those higher interest loans with payments that go on forever because all you see is the lower payment. So try and ignore that sweet pitch for a lower payment if it means you just dug yourself a bigger hole and put yourself deeper in debt.”
One of the most popular (and safest) ways to consolidate debt is through a home equity loan.

“Many people use home equity loans for debt consolidation. They will often get a pretty good interest rate, and since you can deduct interest payments on their taxes, making the "real" cost even lower. But, of course there is a down side, you must use your home as collateral. Which is just a fancy term to say if you miss your payment I can take your house. And there goes the roof over your head...Literally!”

Whatever you do, ignore all of the ads for home equity loans or lines of credit for more than your home is worth. That is basically just asking for a foreclosure.

Although paying off your debts by using credit cards sounds like a recipe for disaster, if it is done correctly, it can work quite well.

“Consolidating your debt on a credit card comes off as a pretty bad idea; however it can actually be a great resource if done correctly. Credit cards sometimes offer some of the lowest interest rates around and they are easier to acquire than most debt consolidation loans, but the best part is that they don't require collateral like your home equity line does.”

This can be a very tricky situation, so be sure that you read the fine print, and are not going to get yourself into more trouble than you were originally in.

This is a really bad idea for anyone who has trouble making monthly payments!

Plain debt consolidation loans seem like they would be the easiest and most logical choice, but this is definitely not always the case.

“A debt consolidation loan is an unsecured personal loan, and they can be difficult to get if you already have a lot of debt. The bank doesn't like to give you a loan if you monthly payment on your debt not counting your mortgage is more than 15%-25%, depending on your credit, of your gross monthly income (before taxes). The bank feels like you are just going to go and charge back up your balances, which happens all too often. Because of those big negatives the going interest rate on these types of loans are about 15% or more.”

The moral of this story is to take immediate action to eliminate or at least take control of your debt!

Back to Articles