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Debt Consolidation Overview

29th March, 2010 - Posted by Sean Horan - No Comments

If your debt has become too difficult for you to manage and you find yourself underwater, debt consolidation might be the solution you are looking for.  With debt consolidation, you apply for a loan that you use to pay off your debt.  This can be a great help if your problem is having credit cards and/or other unsecured debts that you need to pay off to free up more income.  Ideally, you will qualify for a large enough loan to cover your debt, and has a low interest rate.  This will give you a smaller monthly bill to pay and lets you combine your debt into one manageable payment.

Where you can go astray is when you use it as a way to allow yourself to increase your spending.  The goal should be to lower your spending, not increase it.  If you replace payments that totaled $1000 per month with payments that total $500 per month, it places you in a better financial situation. But if you take that extra $500 and go out and spend it on things other than your bills, you’re not putting yourself ahead in the game at all.  You can in fact be making your situation even worse.

You should also be aware that if your credit score is not strong, you are not likely to get the favorable low-interest loan terms.  You may still have a lower monthly payment than before you consolidated, but the loan itself may be stretched out over a longer period.  That translates into more money paid.