Needless Debt

In our last post we looked at how you can use credit counseling to help get our of debt. In this post in the “Learning About Debt Solutions” series we are going to take a look at debt consolidation.

About Debt Consolidation

Debt consolidation is similar to the Debt Management Plan we discussed in the previous post about credit counseling in that you can combine your multiple payments under one new payment. A lot of times this new payment will have a better interest rate than some of your high interest credit cards. However, this requires taking out a new loan and generally is only available to those with at least decent credit. Sometimes these payments can take longer to amortize than your original debt even though the payments may be lower.

Cost

Many times debt consolidation should be seen as a method rather than a program. It is simply a loan that you take out and use to pay off your current debts and in turn pay the loan back over time instead. Therefore, the costs will be determined by the interest rate and amortization of the loan. However, as Dave Ramesy notes, this only treats the symptoms of your debt problems and many times you will find yourself right back into debt.

Affects on Credit

Debt consolidation in itself doesn’t have any effect on your credit as long as you make the appropriate payments on the loan you took out.

Conclusion

Debt consolidation is a good candidate for those that may have a history of good credit but may have unforeseen emergencies that came up and caused a lot of debt in a very short amount of time. Debt consolidation loans should be used with care as many of them are secured loans. This means that if you don’t make the payments on your consolidation loan you can lose the item that was used to secure it. For instance, if you took out a loan against your house and you don’t make your payments then you can lose your home.