Things to Consider Before Consolidating Your Debt You’ll have to be disciplined to make sure you’re not accumulating more debt after you paid it off.
Debt consolidation is an attractive idea if it means a consumer can get only one, low monthly payment to pay off his or her debts. This step should give the consumer a more manageable financial situation, but it may not always be the case.
There are some things to consider before jumping into a management plan with a disreputable company or for the wrong reasons. To make sure consolidation is the best option, the consumer should consider several important facts about loan consolidation.
When a consumer consolidates his or her debts, they may combine high interest rate loans such as credit cards with low interest rate loans such as student loans. This may not be a good idea, because the consolidation loan may have a higher interest rate than some of the loans being combined. The consumer ends up paying more interest than they were before.
Consolidating debts could also mean the consumer takes more time to pay off the loan than he or she would have if they didn’t consolidate. It may look attractive for the consumer to lower their total payment and make their financial situation more manageable.
However, they should look carefully at the total amount of time until the loan is paid-off because it may mean they have to pay for a longer period of time. In this case, the lower payments are nice, but the price may be debt slavery.
Before considering consolidation of loans, the consumer should examine his or her spending habits. Statistics show that almost 80 percent of people who consolidate their loans and gain some advantage lose this advantage because they create new debts. To avoid this, the consumer needs to have a budget and stick to it.
Consolidating loans means the consumer makes one payment to the credit counseling agency that distributes the money to the creditors until the loans are paid. There is a wide range of credit counseling agencies, and the consumer needs to make sure he or she is dealing with a reputable company. It's wise to choose a consolidation agency that is recommended by the Association of Independent Consumer Credit Counseling Agencies (AICCCA). Another recommending agency is the National Foundation for Credit Counseling (NFCC)
These agencies make sure their member agencies are up to rigorous standards that are set by the Council on Accreditation for Children and Family Services Inc. and other approved authorities. Their counselors must pass a comprehensive certification program.
Consumers should still ask a few questions such as:
• Does the agency send the payments to the creditors on time? • Does the agency send statements regularly to the consumer? • Does the agency offer consumer financial education?
If an agency the consumer is considering doesn’t give a positive answer to the above questions, the consumer should select a different one.
Almost all consolidation agencies basically offer the same plan. It first determines how much it will take for the consumer to pay off his or her loans in three to five years. Payments usually run at about 2.5 percent of the total debt. In hardship situations, the agencies will give consideration.
In some hardship cases the payment may be reduced to 1.75 percent along with cutting interest rates. When the consumer has extra funds, they can pay more and pay off the loans sooner. They can also stop the plan at any time.
Consolidation usually begins with a counseling appointment to determine if consolidation is the right move for the consumer. In some cases, it may not be the best solution. The first thing the counselor will look at is the amount required for the consumer's basic expenses.
When these are subtracted from the income, it will be apparent if consolidation is the best option. If not, the counselor may offer other options. Counselors are there to help the consumer. They should be knowledgeable and compassionate and motivate the consumer to pay their creditors. If the counselors are pushy, judgmental, bored or rude, the consumer should ask the agency for a different counselor.
In order for consolidation to be beneficial, consumers should have the bulk of their debts in unsecured loans such as credit cards and personal loans. Consolidation may not be beneficial for loans such as child support payments or tax arrears. The consumer must also be confident that they can make the payments that are required for years, not just for a few months.
Another benefit of consolidation is the consistency of the monthly payments. They never change until the creditors are repaid. Once the consumer starts to make consolidation payments, any creditors who have been calling about overdue accounts usually stop.
The best way for a consumer to know if debt consolidation is the right step is to talk to a reputable credit counseling agency. With the right plan, consolidation can make life much easier.