Guide to Debt Consolidation Chapter: 1 2 3 4 5
Debt Consolidation Defined
If you have chronic debt, it's probably been a while since you held a fistful of dollars that wasn't already spoken for. Debt consolidation may ease up your payments so that you can satisfy your financial obligations and keep a few greenbacks in your pocket.
What is debt consolidation?
Debt consolidation is the practice of taking out one large loan and using it to pay off several smaller loans. For consolidation to be beneficial, one or both of the following must be true:
Table of Content
- 1. Understanding Debt
- 2. Debt Consolidation Defined
- 3. The Right Time for Debt Consolidation
- 4. Types of Debt Consolidation
- 5. Avoiding Debt Consolidation Scams
- The new loan carries a lower interest rate than the old debt.
- The new loan has a longer repayment term than the old debt.
Done right, consolidation should result in:
- Lower monthly payments
- Streamlined bill-paying
- Fixed pay-off schedule
- Elimination of collection calls and notices
- Fewer sleepless nights
While it might seem like an odd strategy-taking out debt to pay off debt-consolidation can be a positive change for borrowers who are in over their heads. Here's why: Short of bankruptcy, the only way to eliminate debt is to pay it off. But making minimum payments covers little more than the interest that's added to your account every month. Plus, big debt balances can snowball with late charges and cause interest rates to increase. Consolidating that debt into a lower monthly payment can accelerate its pay down and save you thousands of dollars over several years. Since you have to pay off the debt anyway, consider it an investment in your future (good debt) and do it as efficiently as possible.
Now that you know what consolidation is, you're ready to get into the heart of things and determine whether your debt is dire enough to warrant consolidation.
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