Structuring a Debt Consolidation Program

Debt consolidation programs have helped countless individuals escape the diabolical clutches of debt. If you find yourself deep in the red, here are some simple ways to begin the journey back into the black.

Procrastination is the biggest enemy of anyone in debt. It's too easy to make those minimum credit card payments month after month without taking time to create a long-term solution for your financial troubles.

Fortunately, getting started on a debt consolidation program can be just as easy. And the benefits in the long run are simply too good to pass up.

Phase 1: Calculate how much you owe

Start developing your debt consolidation program by analyzing the root cause: Calculate how much you owe. Gather up all credit card and loan statements, and write down all outstanding balances. (You may not want to include car loans in your calculations unless they're at particularly high interest rates.)

When you've completed the list, add up all the numbers. This sum will be the amount of money you'll need for your debt consolidation loan.

Phase 2: Determine your minimum payments

Next, reference the minimum payment section on all your statements. List them all on a monthly basis, and add them together. This number will be the benchmark for your new debt consolidation loan; the new monthly payment should be lower than the sum of all your minimum balance payments.

One word of caution: If you have a relatively small balance on a loan or credit card, it doesn't make sense to include it in your new loan. Instead of stretching out those payments and adding long-term interest, you're better off paying the balance on the debt.

Phase 3: Find the right debt consolidation loan

The next step is to track down the right type of loan. Most people choose from a second mortgage, a cash-out refinance first mortgage, or a personal loan.

• A second mortgage, which can be either a home equity line of credit (HELOC) or a home equity loan, uses your property's equity as collateral. Both types of second mortgages have tax-deductible interest, although the HELOC is variable, and the home equity loan is fixed.

• A cash-out refinance involves rewriting your first mortgage, and then pulling out additional money from your equity. You'll pay more in long-term interest payments, but the loan's lower monthly payments may help on a short-term basis.

• A personal loan is the least attractive loan option because it generally includes higher interest rates. Use it only as a last resort.

If you find yourself pinched for cash every month, consider setting up a debt consolidation program. Calculating your loan amounts and their payments will help you find a consolidation loan that will lower your monthly expenses. It will take some time and effort, but in the long run, you'll reap the rewards.