You can't continue to avoid the prospects of bankruptcy and foreclosure forever. Take action now by considering a strategic debt consolidation.

Getting out of debt is about as easy as walking through swampland wearing cement shoes. Every step forward pulls you just a little further into the financial quagmire. You could give up and sink straight into foreclosure and bankruptcy...but what if there's another option?

Debt consolidation might be your last-ditch solution to escape this predicament once and for all. Structured properly, debt consolidation will reduce your monthly payment burden and give you the breathing room you need to pay off your debts without going to court.

Understanding debt consolidation

Debt consolidation loans work by reducing your interest costs and your minimum monthly payments, while restructuring your debt to a fixed payoff schedule. In truth, many debt consolidation loans fail, because the borrowers desperately leap into a situation without really knowing how to make it work. Therefore, it's important to approach debt consolidation while thinking clearly and strategically. Here's a roadmap to get you moving in the right direction:

  1. Itemize your debt. Make a list of your debts. Include amounts owed, interest rates, whether the rate is fixed or variable, and the length of time it will take for the debt to be paid off if you continue making minimum payments. A debt payoff calculator can help you run the numbers.
  2. Price the rates. The lowest priced debt consolidation loans are mortgages. If you have home equity, research refinancing and home equity loan rates. If you don't have such equity, get quotes on unsecured debt consolidation loans.
  3. Compare rates. Debt consolidation only helps if the loan you can get is cheaper than the debt you're consolidating. Review your debts in comparison to the consolidation loan rates that you're quoted. Debts that are priced higher than the quotes are candidates for consolidation; the rest are not. Estimate how much of a loan you'll need by adding up the accounts that you plan to consolidate.
  4. Compare payments. With an interest rate estimate and a loan amount, you can calculate consolidation payments using any amortization calculator. Run the payments based on different loan maturities of five, 10, or 15 years. If you need to refinance your entire mortgage, look at 30- and 40-year terms. Next, compare your current payments to those of the prospective consolidation loan, starting with the shortest maturities first. Will the loan provide enough breathing room to keep you out of bankruptcy or foreclosure?

By now you have a pretty good idea of what a debt consolidation loan can do for you. The other side of the story is how you manage your funds after taking this step. Some borrowers relax and let their spending habits slide; some even start using their credit cards again. In either case, if you spend more than you make, you'll end up right back in that swamp. And that's no place for you to be-again.

Published on April 10, 2008