How to Decide if Debt Consolidation is the Right Choice for You

We modern people are crazy for loans, aren’t we? It seems like we can’t afford a good life without getting into debts. You take loan to educate the children, to purchase a new house or car, and before you realize, you end up in a financial mess – a number of debts from different creditors.

Worried over the mounting debt and long list of creditors, you ask people if there is a solution. And someone tells you about debt consolidation. That’s good. Consolidating your debts can save you time and money if it is right for your personal financial situation. But how do you decide whether, among all the options, debt consolidation is the right choice?

You can conclude that debt consolidation may be a viable choice…….

If You Can Afford to Pay only the Minimum Amount on Credit Card Bills

In case your income isn’t high enough and you barely manage to afford the minimum monthly bills on credit card, you may consider debt consolidation. However, you don’t have to jump into it immediately. I advise you to first negotiate with your creditors for a lower monthly payment.

Are you currently able to pay just a little more than monthly minimum? Negotiating with your creditors can still work for you. In fact, this is what debt consolidation companies do. If you succeed, it will be a “double win” situation. Though there will be increased time period for payments upon lowering the interest rate, it is worth it. You can then pay more on the principal amount and reduce your overall debt quickly.

If You Are Totally Screwed up

I have seen many people who are consistently late on payments. Worse, even after making late payments they have to borrow from others for household expenses. If you are, unfortunately, among them, I encourage you to choose debt consolidation before it’s too late. And ask your debt consolidator for as low rate as possible.

Another scenario when you should consider debt consolidation is if more than 25% of your monthly income is spent on paying credit card bills. This is an alarming rate and you need to lower the payments as soon as possible.

If You Are Ready to Bear the Shortcomings of Debt Consolidation

Yes, debt consolidation has some shortcomings, too. There are two types of debt consolidation – secured loan and unsecured loan. If you choose secure loan, you have to put your valuable property like house or car as collateral. It means if you fail to pay back the loan, the debt consolidators will take possession of your car or home that was kept as collateral. Go for it only if you are confident you won’t end up losing your house or another valuable property.

There is no need of collateral for unsecured loans. The finance company considers only your credit history. Primary advantage of unsecured loan is that you don’t have to risk your personal property. But you’ll have to pay a higher interest rate.

Do You Meet the Above Criteria?

You might have noticed that before beginning the above “IFs” I said, ‘debt consolidation may be a viable choice.’ I said so because you can’t decide by just meeting the above criteria, you have to know some more things. Make your final decision after you have got answers to the following questions.

  • Can the interest rate on your consolidated loan change over time? If so, Will you have to pay more?

  • What is the term of the loan? Will there be any penalties, charges, or additional fee if you miss a payment or pay the debt off early?
  • Have you calculated that the new monthly payments are suitable for your budget?
  • Have you considered other options such as home equity loan or personal loan? Do they seem better than debt consolidation?

Once you get the answers, you’ll find it easy to decide whether you really need a debt consolidation, or you are better off using other options like home equity loan, personal loan or by negotiating a lower rate.

Willie Rhoades is a finance analyst who enjoys writing about debt consolidation and other personal finance related topics at http://www.debtconsolidationloans.uk.com. He has written many articles over the years and enjoys authoring reports offering money saving tips that can easily actioned.

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