Many people do not fully understand the process of debt consolidation. This article is aimed at providing an overview of the subject and presenting some of points for and against using this method to deal with financial problems.
Essentially it involves borrowing money for the purpose of settling current debt. Frequently this is managed by a firm that specializes in this sort of financial management but individuals are perfectly able to negotiate their own arrangement although it is necessary to be very self disciplined.
The main advantage is that debtors only have to worry about paying one main debt account. If worked out properly it will also result in reduced outgoings towards settling debts thus reducing the pressures on the household or individual budget.
On the down side is the fact that you will be paying the new loan for a longer period as the effect of paying reduced monthly amounts results in paying for more months. In addition the added interest and fees will mean that the amount of the new loan is more than the sum of all the combined individual debts. This approach is usually not adopted to debts arising from home loans or unpaid income tax.
The point at which the pros outweigh the cons will differ depending on the personal situation. Getting to grips with the magnitude of the problem is therefore very important. What needs to be assessed is whether you have a difficulty or a major catastrophe brewing in your home finances. The approach to solving these problems will depend on this assessment.
Perhaps you are managing the important monthly payments such as accommodation, mortgage, local dues, energy bills, groceries and school fees. However, you miss or are behind with payments to credit card providers, store charge cards, sports club, and phone or internet services.
If this describes your personal situation it could be that you need to make adjustments to your way of life and consider approaching creditors with repayment proposals. Not being able to meet your important commitments, however, is more serious and may suggest that you could benefit by consolidating your debts.
If using a firm that manages the process for you then clearly establish the fees and interest charges payable before signing. Also read and understand all the small print. Check around for the best package available, if a company knows you have other quotes they may offer a more attractive deal. If you are able to provide some form of guarantee, such as property, you may be able to negotiate lower charges.
Deciding to go it alone is fine if you know what you are doing. A word of caution though, be wary of the effect that receiving a large lump sum can have and resist using it for unplanned expenditure. Payments each month are worked out according to how much one can manage to repay. It is important therefore to be open and sincere in this respect and keep something in a contingency fund for the unexpected.
Deal with any doubts by consulting a debt advisor. There are many free government and charitable advisory services available for this. Once committed to a debt consolidation plan it is vital to stick to it and honor the agreement. When it gets difficult look to the future. Just imagining being debt free is sufficient motivation for most people.
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