Debt consolidation is when you take a new loan with the purpose of repaying your older ones, thus resulting in a lower interest rate for the money you’ll still have to repay from that moment on or in smaller monthly installments which may extend over a longer period of time.
A debt consolidation loan can be good, but it can as well be a very bad choice. It all depends on your will to become debt free: if taking the new loan you are just increasing the amount of debt, you did nothing for improving your financial situation. If you do what you should, and get rid of older debt such as credit card debt or short term loans, which usually have high interest rates, then consolidation is a good choice for you.
Before getting too excited about the possibility of paying less for using the bank’s money, you need to be aware that not everybody qualifies for a consolidation loan. If you have a bad credit score, nobody is going to give you any more money than you already have to repay. Banks are businesses after all, and like all businesses, they need to be profitable or die. Why then, would they lend money to people who are probably not able to pay it back? Moreover, with this financial and economic crisis that was probably generated by loans given to people who couldn’t afford them, banks and other lenders have adjusted the conditions for granting loans in order to avoid such situations for the future. Nonetheless, you still have chances, but probably the conditions won’t be as good as if you had an excellent credit history. You can always go for another mortgage or for a secured loan, but before jumping into this, put all figures down on paper and see if it is really worth the pain. Basically, think of what do you want to obtain from a debt consolidation loan: lower monthly payments, lower amount of money to repay, fewer places where you need to send money to each month, or whatever other reason you have for taking this step. After you did this, just see if the loan you want to take will get you to your final aim. If it does, take it, if not, forget about it and start considering alternatives to ease your financial burden.
Are There Alternatives To Debt Consolidation Loans?
If you have a mortgage you have troubles in paying, just keep in mind that your creditors don’t want to take your house. They don’t need it. They just want their money back, plus the interest you agreed to pay them. Your house means only trouble for them because they’d have to sell it, then they’d only take what you owe them and give you the rest (supposing there’s any rest to give, in the current market conditions). So, creditors may be willing to re-negotiate your loan agreement and give you new conditions that you can afford. Just go, set up a meeting, explain your situation and ask for advice from your creditor directly. What’s the worst that could happen anyway? To get a no as an answer? You may be surprised of how easy it is to get a better deal.
If your creditors are inflexible, maybe there’s still hope. This is not the best solution of all, but if it can get you out of trouble, it might be worth looking into it. I’m talking about the possibility of getting a secured bad credit consolidation loan. However, this should be your last resort, because it puts you in a bigger danger of seeing your home taken away by creditors, and then you’ll land in the real trouble of not having a roof above your head. If you have also a family, it’s even worse, so try not to get deeper in debt.
Regardless whether or not you’re going to get your debt consolidation loan, try to analyze your behavior towards money and to figure out why you have landed in such an uncomfortable position. This is useful for you to make adjustments to your living style and to your spending habits, in order to avoid debt accumulation at least from this moment on.
