The answer to this question depends on you. Debt consolidation has not worked for everyone, but there are specific reasons for this. It’s also true that debt consolidation has helped people eliminate their debts. Why does it work for some but not for others? Let’s find out.
What Is Debt Consolidation?
First, a definition of debt consolidation is in order. Right now, you may have several debts to pay at different interest rates. When you consolidate your debts, you will obtain one large loan that will be used to pay all of your debts in full. The consolidation loan will, most likely, have a lower interest rate than all of your other debts combined. So, you will save money on interest. You will also have a lower payment each month.
It seems simple, but people do not always work the program correctly. Economists have learned that 70 percent of people who receive consolidation loans to pay their debts find themselves in debt again in just a few years. Why is this the case?
Credit Counseling Is Not Required
You are not required to undergo counseling to obtain a debt consolidation loan. Those who do not do this voluntarily never learn what they did to end up in debt in the first place. When they are out of debt, they go back to their old habits, and those are the habits that got them into debt.
Consolidation loans do work to eliminate debt. To stay out of debt, you have to change your behavior, or else what has happened to the others before you will happen to you.
The Debt Consolidation Service
You can hire a debt consolidation service to help you, but this is one way in which people can get into trouble. Not every debt consolidation service is reputable. For example, some of these firms charge astronomical fees. These fees may need to be paid up front before you receive any services. Others may charge you interest for their work. If you decide to allow them to make your payments for you, you may be required to pay a monthly fee.
Payments for a debt consolidation loan are less expensive because the lender extends the terms of the loan. When you do this, you will actually spend more money on interest because you will be making more interest payments for a longer period of time. You can get a loan that has a lower interest rate, but you will have paid more in interest when it is over.
A debt consolidation loan will get you out of debt eventually, but others have increased their debt by only making the minimum payments on the loan. If you were to do this, a debt consolidation loan would be very expensive.
If you are thinking of a debt consolidation loan, take some time first to calculate how much interest you would be paying over the life of the loan. This activity will be very useful in helping you to decide whether a debt consolidation loan will work for you.
Using Your Home’s Equity
Some people have obtained a home equity line of credit, cash-out refinance or home equity loan to consolidate their debts. This presents one problem. If your debts are unsecured, you will be switching this debt to a loan that is secured by your home. This hasn’t always worked out well for people.
That doesn’t mean that consolidating with a home equity loan is totally out of the question. You only need to be 100 percent sure that you can make the payments. Otherwise, your lender will be within his or her rights to foreclose on your home to obtain payment for the loan.
Before you decide to consolidate by using the equity in your home, ensure that you have 20 percent or more equity in the house. If you can comfortably make the payments and you have enough equity, debt consolidation with a home equity loan may work out well for you.
It’s clear that debt consolidation has the potential to eliminate your current debt, but it also has a reputation of making people fall even farther into debt. The best thing to do is be prepared to make your program work by changing your habits and choosing the right plan. Then, you will be able to say that debt consolidation works.