Using Debt Consolidation Wisely

Debt consolidation is a widely offered method for getting your debt problems back under control. The basic idea is to use credit, usually a loan, to pay off all your existing debts, so consolidating or combining all your borrowings into one financial arrangement.

Lower Payments

The point of this is to relieve the stresses and strains of multiple debts, simplify your finances, and - most importantly - to reduce the actual amount you have to pay each month to service your debt. There are two ways to ensure your payments are lower.

Lower Interest Rate

If you have debts on a credit card account, you're likely to be paying interest at a rate of at least 15% APR, and in some cases up to double that. Most personal loans come at a lower price, and so shifting your debt into a loan will normally result in cheaper repayments.

Ideally, you'd want to choose this lower interest rate option, but if your debt problems have caused some damage to your credit rating then you might not be able to get a loan with a sufficiently low rate, so another method should be used.

Longer Repayment Term

The other option is to spread your debt repayment over a longer term, meaning your repayments will be lower - albeit with the cost of paying more overall interest before the debt is repaid.

Whichever way you get your monthly payments down, for consolidation to be effective you need to make sure that you arrive at a repayment figure you can afford.

Pay Off Debts

Once you receive your loan, you should immediately clear all your existing debts. Don't be tempted into spending some of your new 'wealth', and certainly don't be tempted to start running up new credit card debts. Cut up your cards, and close your accounts - maybe leaving one open for emergencies. If you don't do this, you risk getting yourself into a worse position than before - having new credit card debts while also having to make payments on your consolidation loan.

Secured or Unsecured?

Credit card debts are unsecured, and as such can't directly lead to you losing your home. Most consolidation loans will be secured on your property, which means that if you don't keep up with your repayments then the lender has the option of pushing for repossession. This danger is something to bear in mind when planning your consolidation effort - you need to make sure that you can realistically afford to keep up with your loan repayments or risk losing your home.