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When to Consolidate Your Debt

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Dealing with debt, especially a large amount, can be one of life's most stressful challenges. There are many different approaches to managing debt, some legitimate and some less so. Debt consolidation is one of the best ways to handle debt, but it too comes with some drawbacks.

What is Debt Consolidation?

Debt consolidation is a method of debt management in which you take out one large loan to pay off many other, smaller, loans. In most cases, this involves taking out a loan against some form of collateral, usually a house. Having collateral will most likely give you a lower interest rate because it reduces the risk to the lender. If you fail to pay back the loan, the lender will seize the property as payment of the debt.

When to Consolidate?

The obvious answer to this question is: when you have a lot of debt. If you have a bunch of different loans and are having trouble making payments, debt consolidation can help you out. Through consolidation, you can set yourself up so you only have one payment per month, making things much simpler.

Another option is to consolidate only your high-interest debt, like credit cards. These are often the most difficult debts to manage; consolidation might help you get control of them.

The Dangers

Remember, there is no perfect solution to debt. Consolidation has some downsides:
  • While you may free up money in the short term, consolidation alone is not a cure for bad credit. You're still going to owe a lot of money, and it may take you much longer to pay it all off.

  • The available credit on your credit cards may increase, making it seem like you have less outstanding debt. If, however, you use this credit, you'll just be making more of a mess out of your credit.

  • Though you have a lower interest rate, you may end up paying more total interest, since the loan is over a longer term.

  • You're risking a lot by using your home or other valuable assets as collateral. If it turns out you still can't handle your debt, you'll be in danger of losing your collateral.

Where to Start?

There are many avenues available for debt consolidation, some better than others, so do plenty of research to find the best lender and the best consolidation program for your needs. Here are some places to look:
  • Look at local credit unions or banks that you already have a good relationship with. You'll know they're reliable and they are likely to give you a reasonable deal.

  • At a person-to-person lending website, you may be able to find someone who is willing to consider your story rather than just the numbers.

  • New banks that you don't have a relationship with could offer you a good deal in order to get your business.
Just make sure the company you go with is legitimate and reputable. Check out their reputations with the Better Business Bureau, and read some online reviews.

Debt consolidation is by no means a quick fix. You'll still need to be financially responsible, and you'll have to work hard if you want to get out of trouble, but consolidating your debt can be a great means of helping you achieve financial freedom.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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