Consolidating Debt--You Have Options
The idea of consolidating sounds enticing but if you aren't careful you can find yourself in more debt than you were before. There are multiple ways to consolidate debt. Debt consolidation loans, debt consolidation through credit counseling, debt consolidation through balance transfers, or consolidating through debt settlement. It is important to weight your options before choosing.
A debt consolidation loan is money loaned to pay off all other debt. You will have a fixed monthly payment to replace your current multiple payments. Your new monthly payment should not be more than your multiple payments when added together. This type of loan is typically ideal because it has fixed payments and lower interest rates. The down side to a debt consolidation loan is that, though you may have a lower interest rate, it can still cost you more money due to longer their terms.
Debt consolidation through credit counseling is when a credit counseling agency offers you a debt management plan. A debt counselor is assigned to work with your lenders to get interest rates cut and waive any late fees that you may have incurred. They will then create a plan to help get your debt repaid. You will have a fixed monthly payment that you will make to the agency and they will disburse the money to the lenders you owe. The down side to this is that your credit cards can get closed out which will have a negative effect on your credit score. It can also take as long as 5 years to complete a debt management plan.
Debt consolidation through balance transfers can also be a good option to consolidate debt. If you have 4 credit cards with interest rates of 24%, 18%, 19%, and 15% you may be able to transfer their balances to a new card with 0% interest rate. Some companies even give you up to 36 months with 0% APR. It would be wise to use these months as a time to pay down as much as possible or payoff in full. The down side is that some companies charge a fee to make the transfer. It may or may not be more beneficial to transfer depending upon how much debt you have.
Consolidating through debt settlement has become increasingly popular. Unlike the other options above, this is the only option that allows for your debt to be paid off instead of being moved around.
Each month you will transfer money to an account similar to an escrow account. As soon as enough money has accumulated, the settlement firm will contact your lenders and begin negotiations. The downside to this is that ultimately there are fees attached. The fees are based on a percentage of the amount of debt you are settling. It can also have a negative effect on your credit score.
My personal experience, I have consolidated debt twice with loans from my credit union. They offered a lower interest rate than what I was getting on all my credit cards put together. I was offered a rate of 10%. Each credit card rate was somewhere around 18%, 24%, 24%, and 17%. It took me about 2 years to pay off each one. The reason I had to do it all over again is because I did not consolidate to payoff like I should have the first time. I consolidated and used the extra money to blow and found myself deeper in debt.
No one option can be said to be the best because it all depends upon how much debt you owe. What worked for me may not work for you. You can consolidate without it having a major impact on your credit score just if you pay everything in full.
The key to debt consolidation is to consolidate with the intent to payoff. If you are just going to use the extra money to blow on wants vs needs, then there isn't a point in consolidating. Use the extra money to your advantage. Start a savings account, pay extra on your consolidation loan, invest it into something that will make you more money in your future. Weight your options, run the numbers, if it will save you money go for it, if not, stay where you are and pay down aggressively until paid off completely.
Have you had to consolidate before? If so what was your experience like?