Debt Consolidation

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What is Debt Consolidation?

(Note:  If you want to move quickly on consolidating your debt, check out the links on this page.)

Debt consolidation is simply taking out a loan to pay off your other loans.  In fact, for people who are deeply in debt, it may be the only kind of loan that can be obtained.

If you are maxed out on your credit cards, have hurt your credit rating by being late with payments, and so forth, you would not be able to get a traditional loan, because the lender would see how much debt you already have and notice that you would be considered very high risk.  You may need credit repair, too.

With debt consolidation, however, the lender realizes that you are not increasing your debt, you are simply transferring it from one lender to another.

Advantages of Debt Consolodation

There are a number of big advantages to consolidating your debt, but make sure you read about the dangers of debt consolidation, below, too.  Here are some advantages:

  • When you consolidate your debt, you only have one payment to make--just one check to write!

  • Sometimes your total payment on your consolidation loan is smaller than the total of all the other payments you made before.
Consider these alternatives:
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Do You Need to Repair Your Credit?  Short article on repairing your credit.
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  • As long a you make this one payment on time, you can start rebuilding your credit rating.  That can be very important in future years.  You may need access to more money at some point.  In fact, most of us do!
  • You are often able to make your payments on a schedule that is easier for you than your schedule was before debt consolidation.  For example, if you are paid every two weeks, you can structure your repayment of your consolidation loan for every two weeks.
  • Usually your payment will be taken directly out of your paycheck.  That assures that, as long as you keep your job, you'll be debt free on time.

Do You Need to Repair Your Credit?  Short article on repairing your credit.


Dangers of Debt Consolidation


Of course the company that restructured your debt has a right to be paid for their work that they have to do in order to deal with your previous creditors.  But you need to do some comparison shopping to be sure that you are getting the best possible deal.  Some of the ads on this page may be a good starting point in your comparison shopping.

You especially want to compare the debt consolidation companies on these  factors:

  • What are the fees they charge for consolidating your loan?  There often are fees that are added to the total that you owe.  Just make sure you compare several companies on this.
  • What is the interest rate they charge?  If your credit rating is not good, you're not going to get as good an interest rate as someone with a good credit rating, but you need to make sure that it is lower than what you currently pay on average on your current loans.  Other wise, the debt consolidation does you no good!
  • Do the payments increase over time?  Some times debt consolidation is set us in a way that assumes people will be making more money in the future.  Maybe that will be true.  But if your payments are set up that in two years, for example, your payments will be higher than they are at the beginning of your debt consolidation schedule, then think about what will happen if you are not making as much money in two years as you think.  You'll be right back in the same situation.
Debt consolidation is a great alternative for many people, but the key is to compare, compare, compare.

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