Is Debt Consolidation Right For You?

People who are in debt have several options open to them if they want to clear their debts. No option is particularly easy, but it depends on how much is owed and individual circumstances as to what the best solution might be.

The best way to deal with debt of a manageable level is to pay it off as and when you can. Putting aside any available income to clear a backlog of debt is not easy, but if you keep your spending to a minimum, you should be able to gradually get on top of any unpaid bills and overstretched credit cards. It may take a long time, but if you persevere you will gradually get ahead.

However, some people will be out of their depth in debt, and feel that they have lost control of the situation. In this case, it may be best to take advice from a debt management company. Although you will have to pay for their services, it can take a lot of the mental stress and pressure out of the situation.

Debt consolidation - Debt adviceA debt management company will assess your debts versus the available income that you have. The advisor may suggest setting up a debt management plan. Usually this is where the debt management company contacts all of your creditors and works out a repayment plan. Instead of paying each creditor what you owe, you pay the debt management company a monthly payment, which it then redistributes among your creditors. In some cases the debt management company may be able to negotiate an interest freeze while you pay the outstanding debts back. Creditors are usually willing to negotiate with debt management companies more than they might with individuals as it means they have a better chance of recouping their money.

If your debt level is extreme, then the debt management company might suggest a debt consolidation loan. This is where you take out a new loan to pay all the outstanding debt that you have. This will remove the pressure of having to manage a series of debts with different creditors. However, it doesn’t mean that the debt has disappeared. You’ve just put it into one basket and you will still have to make a regular payment to pay it off. On the plus side, the debt consolidation loan will offer more favourable interest rates and a longer repayment period than the average creditor.

The main danger with debt consolidation is a psychological one. Having all your debts effectively wiped clean with a new loan may give you a false sense of security. You may begin to think it’s ok to start spending on credit and store cards again as your outstanding debts no longer exist. However, the new loan still requires paying off and you shouldn’t be tempted to start spending again before you have cleared the debt consolidation loan.

The pros and cons of debt consolidation

Debt consolidation gives you clarity. It’s far easier to keep track of your income and expenditure with only one monthly payment to keep up with.

If you find meeting the various repayments every month a struggle, then debt consolidation can help lower the amount you need to find each month, as the loan will run over a longer period than your current debts.

However, if you go down the debt consolidation route, your credit report could include a record that you did not keep up with original credit agreements, making borrowing money in the future more complicated or problematic.

With debt consolidation, you stand to remain in debt for a longer period and you will end up paying more interest overall.

Is debt consolidation the right choice?

Deciding whether debt consolidation is the right choice is down to each individual’s own circumstances, the amount they owe and whether there is an alternative like borrowing from a relative. Always seek independent financial advice before taking out a debt consolidation loan.

Bio: Susan managed to clear her $50,000 of consumer debt over a five year period. She now assists other people to achieve similar goals through helping them structure debt repayment plans on a voluntary basis.

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