Is Debt Consolidation a Good Idea?

Although many people think of scams and being ripped off when they think of debt consolidation loans, there are actually many reputable companies out there all offering the same basic solution to a person’s debt problem. So let’s take a closer look at “Is Debt Consolidation a Good Idea?”

If you have three loans that were all taken out at different times and have differing balances, and you lump them all together so that you only have one loan instead of three, it is known as debt consolidation.

Debt management is not quite the same thing, and some companies rather misleadingly call themselves debt consolidation companies when they are really just managing your debt.

Unfortunately, many consumers simply do not realize there is a difference between the two terms, and some unscrupulous companies call themselves consolidation companies as they know that is what consumers are looking for.  If you are looking to consolidate date, the following information may help you to determine if this is the right approach for you.

How Debt Consolidation Loans Works

There are actually different methods of consolidating your debts, and each tends to have its own advantages, disadvantages, and risks, although the basic concept is quite straightforward.  Standard debt consolidation loan: If you lump all your existing debts together into a single loan, it is known as a standard debt consolidation loan. The loan is typically taken through a bank or credit union and because you only have one loan at a lower interest rate, rather than several high-interest rate loans, the benefits are clear.

Student Loan Consolidation: The fact that you are often borrowing money from the Federal government makes these loans different from other types of loan. They also have the advantage of often having a flexible payment schedule and a low-interest rate. However, some other types of debt are much easier to discharge if you ever have to declare bankruptcy and if you default on a student loan, you could find your wages garnished by the government.

Balance Transfer: If you move, or transfer your credit card debt from one or more card onto a new card, it is a type of debt consolidation, although it is also known as a balance transfer. Here, there is no such thing as a lucky hat, you’ve got to be motivated. The point, of course, is to have a lower interest rate on the new card, and therefore lower monthly payments.

If you are considering taking advantage of a balance transfer offer that you have received, it is important to pay off the balance during any special introductory period. Many cards have a 12 to 18 month period during which they offer an introductory interest rate of 0 percent.

Home Equity Loan: If you own your own home and it is worth more than the amount owed on your mortgage, you can borrow against this; you are borrowing against the extra value of your home. The interest rate on these loans is often low, giving you relief, and making them a realistic option to having several high-interest rate credit cards. However, your home can be foreclosed on if you are unable to pay back the loan.

Choosing Among the Debt Consolidation Companies

Because there are so many scams around when it comes to eliminating and consolidating debt, it is essential to find a reliable company and a good place to start is by asking your credit union or bank if they offer the service. Students are so often the slaves to the lender so precaution is needed.

If so, you will want to compare interest rates on your loan, although you may find it more difficult to find a company willing to work with you if you have a lot of consumer debt, according to credit expert Edward Mayberry. Good rates can be found, making it worthwhile to shop around; the lower your interest rate on your single loan, the more money you will be saving.

Credit unions and social lending firms tend to have better rates. Because there are so many unreliable firms around, you should proceed with caution and if something seems too good to be true, it almost certainly is.

Be wary of companies that pressure you too much, make you feel somewhat uncomfortable or are anxious to sell you a product or service other than debt consolidation. Of course, your debt is not going to disappear overnight, and you should not be taken in by anyone who tells you that.

How Your Credit Score Affects The Debt Consolidation Loan Process

Of course, your credit score is important and you want to make sure that it is not adversely affected by consolidating your debt, regardless of which of the above methods that you choose even if that would bring you out of your comfort zone.

The percentage of your available credit that you are currently using is known as your credit utilization ratio, and it is important to understand whether your new loan will affect this figure. In addition, your score may be lowered a small amount simply by the hard credit check which is required when you apply for any type of loan.

However, despite the fact that you may notice a small dip in your credit score because you have a new account, Mayberry points out that consolidating your debts should not really affect your score too much.

For many people with a lot of credit card debt, it is a better option to close all their credit cards and have no available credit, rather than risk not being able to pay on them.  Make sure you understand what is involved in debt consolidation and how it will affect your credit score. However, for many people, it really is an effective answer to their problem of too much debt.