Debt consolidation

By Jakob Jelling
www.cashbazar.com

Debt consolidation can be a valuable tool for reducing your current debt load but has a hidden danger. Consolidated loans are designed to help you reduce the total amount that you are paying to service all of your debts. Not only do you normally end with only one payment the amount of interest being repaid is often lower on a consolidated debt than on a credit card or on an in house charge card. However having one lower monthly payment can lull you into a false sense of security that results in a higher debt load.

While racking up debt is relatively easy to do, getting out of it is a bit harder to do. Oddly enough debt consolidations loans can actually be hard to get for several reasons. Generally people look for a way to reduce their monthly payments on bills because they are finding that they do not have enough money to repay all of their current debts. This also generally means that only the minimum payments have been made recently and perhaps some payments have been missed altogether. Of course this impacts your credit rating and makes a debt consolidation loan harder to get.

An important thing to remember is that a debt consolidation loan is just like any other loan that you might apply for. Your eligibility for the loan is dependant upon your credit score and the fact that you have been keeping all of your payments current may not be enough to get you a consolidation loan. For this reason all the normal rules when applying for a loan are true with consolidated loans. Your first step should be to check your credit report and determine your current FICO score. On average 1 out of 4-credit reports contains errors that may result in you paying a higher interest rate than you deserve to be paying.

If your FICO score is above 600 than you can consider asking a bank for a consolidated loan. A bank will generally give you a lower interest rate and better terms than any other company. If your FICO score is lower than 600 than you will have to consider a third party lender.

Third party lenders for consolidated loans are becoming very popular and as you undoubtedly know there are many companies who are happy to offer you a debt consolidation loan. If these lenders are your only option you must be wary of the terms for their loans before signing anything. Many third party lenders structure their loans so that they receive a portion of your payment and often also receive a kick back from your creditors for ensuring that they get paid regularly. It is not uncommon for a debt consolidation company to receive 10% of your monthly payments as a fee. With this kind of fee structure it will take a long time for you to repay your debts and thus it may be better to avoid the consolidation loan altogether.

Often people find a consolidation loan that works for them and find themselves lulled into a false sense of security. You may have been struggling to meet all of your payments before but now find that you have an extra $200 a pay check. It is often tempting to use this extra amount of money to finance another purchase but at this point that may very well be the worst mistake that you could make. If you where struggling to meet your obligations before you got a consolidation loan then you have over extended your credit and are at risk of having to file for bankruptcy. Adding and extra debt to the total amount that you owe may make things worse.

Consolidation loans are a great tool to help you rebalance your financial status if you have over extended your credit and had a change in your employment. When seeking a consolidation loan ensure that the vast majority of your payment is going to reduce the principal of your debt and avoid getting more credit. Also bear in mind how close you came to having to file for bankruptcy and consider options to help you avoid being in the same position again before considering new debts.

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