You must have too much debt or you probably wouldn’t be reading this article. So, before we get to the issue of whether or not debt consolidation would make sense for you, it might be valuable for you to sit down and think about why you got into trouble with debt in the first place.
What creditors think
Many lenders believe that the reason why people get into trouble with debt is because they’re irresponsible with their credit cards. Of course, in some cases this is true. Some people just can’t handle credit. They view credit cards as a sort of magic wand that they can wave to get anything they want, regardless of the consequences.
The reality
On the other hand, many people get into debt through no real fault of their own. There was a study released in 2006 that showed US wages have been flat 2001 – after adjustments for inflation. In contrast, the costs of basic items such as medical care, food, housing and other household essentials have increased dramatically. To put this another way, not everyone is in trouble because they can’t handle debt. It’s because they’ve taken a pay cut.
Downsized, right sized or just fired
Some 8.1% of us are also victims of the recent recession in that we’ve been downsized, right sized, seen our job sent overseas or just plain fired. Plus, it is estimated that there are another 9.3 million Americans who are underemployed or who have jobs but are earning much less than they were before the recession.
Which group are you in?
If you are in that group of people who have just not handled your credit cards responsibly, debt consolidation might not be for you. A better solution might be to get your finances under control and start paying off that debt the old-fashioned way – a credit card at a time. On the other hand, if you’ve gotten into trouble with debt due to circumstances over which you had little or no control, debt consolidation could be a good solution.
When a debt consolidation loan makes sense
When most people choose debt consolidation it’s through a debt consolidation loan. This is where you use a loan to pay off multiple debts. If you can do this correctly, you can lower the amount of interest you have to pay, improve your credit rating and have a lower monthly payment. However, there are some factors that you need to take into consideration to know whether or not debt consolidation makes sense.
A better interest rate
First, the interest rate on the new debt must be less than the interest you’re paying on the debts you consolidate. As an example of this, suppose you have debt on credit cards with 22%, 20% and 18% interest rates. If you can transfer this debt to a new credit card that has a rate of 15% or if you can get a bank loan at 10%, you will definitely improve your situation.
Other considerations
For debt consolidation to make sense, you should be able to reduce the amount of money you have to pay on your debt each month. In other words, your new payment should be less than the total monthly payments you’ve been making on your debts. You should have the means to pay off that new debt as fast as possible. You can do this by taking the money you’ve saved with your lower monthly payment and applying it against the new debt.
You should not trade fixed-rate debt for variable-rate debt. You might start out with a very low interest rate but it could move up – maybe even dramatically. And, finally, you have to commit to not taking on any new debt while you pay off your consolidation loan.
We can help
If you think that consolidation would make sense for you, call our toll-free number or fill in the form at the top of this page for a free estimate. Our debt relief providers have a 100% satisfaction guarantee. You have nothing to lose by giving us the opportunity to consolidate your debts and get you on the road to a better life.