What Should You Know about Unsecured Debt Consolidation?

There are record numbers of Americans struggling with debt, especially as the unemployment increases, the cost of living increases, and the ability of your paycheck to cover it all decreases. What do you do when you’re in this situation? What do you do when you are using your credit card to pay for basic necessities or when your medical bills are difficult to handle? Many people turn to unsecured debt consolidation. Is this right for you? What should you know before you start a program?

What is unsecured debt?

These are loans and credit you obtained without having to offer collateral. Credit cards, signature loans, and medical bills are all unsecured. Mortgages and car loans are secured because if you default the lender can take the house or car. Debt consolidation can help you put all of your unsecured debt into one payment.

What is the benefit of this? It is much more convenient to have one payment instead of three, four, five, or more. Many people find it easier to manage, and you may pay less per month. This can help you regain control of your finances.

Are there drawbacks to consolidation? The interest rates you see advertised for these types of loans are given only to those with great credit. If your credit has suffered because you have been struggling with debt, you are considered a higher risk. The lender charges a higher interest rate to make up for this risk. While you still may pay less per month than you were before, you may be paying longer. The overall amount of the debt could be more than it was originally. More than seven in ten people who consolidate find themselves in the same debt position, or one that is worse, within a few years.

Does it work? The best answer is that it can. It can work if you do not use the credit cards that you have just paid off, if you change your money habits, and if you can avoid accruing any more debt. For some people, it provides the help they need. For others, though, the loan payments may become a burden. They may not be able to pay even that, and the overall amount of their debt is too heavy. These are the people for whom debt consolidation is not the best choice.

Are there alternatives for getting out of debt? There are several alternatives that you can pursue, including debt management, consumer credit counseling, and debt settlement. Of these options, only debt settlement (also referred to as debt negotiation or relief) is able to reduce the principal amount of your debt. You pay less, and you pay it more quickly than with other methods.

What should I do now? The first step is to speak to a credit counselor about your specific situation and needs. You may find that consolidation will work best for you, or you may find that debt settlement would be a better solution. In either case, it is essential that you seek debt consolidation help as soon as you can so you can begin the process of becoming debt free.