Debt consolidation is one tool that many consumers consider when facing the challenges of excessive debt and/or reduced income. Debt consolidation is usually done in one of four ways, which all should be carefully considered before committing to any debt consolidation plan. Before considering consolidating your debts, you should understand what debt consolidating is, and attempt to gain a detailed understanding of how your own financial management habits affect your current and future ability to mange your debts.

What is Debt Consolidation?

Debt consolidation is a method of combining multiple debts from multiple creditors into a single payment to a single creditor. Consolidation of debt can lead to lower interest rates and lower payments which may provide short-term relief to consumers considering the debt consolidation option for reducing payments. Debts are usually consolidated in one of four ways:

1. Home Refinancing and Home Equity Lines of Credit (HELOC)
2. Personal Loans
3. Debt Settlements
4. Debt Management Plans

Home Refinancing and HELOC loans are a way of using the equity in your home to pay off debts at what is usually a much lower interest rate than your debtors are currently charging you. Personal loans are usually received from a lender and backed by collateral. Debt settlements are usually negotiated repayment terms which may include a lower interest rate and an extended payback period. Debt management plans are usually administered by a third party and may include financial counseling. Each of these plans have pros and cons which should be considered carefully.

Start With A Plan

Before jumping into a financial decision like debt consolidation, you will need to map out your finances in detail. Like any other debt management plan, debt consolidation is doomed to fail without any real change in the way you manage your personal finances. It is important that before you consider any debt consolidation plan that you initiate changes in your own financial management strategies that are aimed at reducing the spending that created your current debt, while increasing savings and investments to begin creating long-term wealth.

Before you decide on debt consolidation, your plan should first include a plan for developing new spending habits that eliminate credit card use, initiate a regular savings or investment schedule, and a strong commitment to spend less or non-essential items. Next include a plan to pay down your monthly debt without debt consolidation. By doing so you may find that you are able to manage your debt in a way that makes debt consolidation unnecessary. You’ll also end up with a financial road map that takes you well beyond your debt consolidation decision.

If you are leaning towards debt consolidation as a solution, it is important that you evaluate each of the four types of debt consolidation plans. Carefully choose the one that best fits your financial situation and especially your ability to successfully repay the loan. You’ll even need to consider what happens if your financial situation does not improve or gets worse. Some debt consolidation plans can make getting debts discharged in bankruptcy court difficult. So taking a pessimistic view of your finances can be crucial in making the right decision.

Avoid Debt Consolidation Pitfalls

Remember debt consolidation neither reduces nor eliminates debt. Debt consolidation simply moves debt from one place to another. In fact, depending on which method of consolidation you choose, you still may be on the hook to individual creditors who can continue to attempt to collect the debt, make phone calls, and continue to report late payments to credit reporting agencies. Some forms of debt consolidation require collateral like your home or automobile. Failure to pay a consolidated loan could force foreclosure of your home or repossession of your automobile. These risks make a change in your financial management habits crucial to your ability to successfully complete repayment of a debt consolidation loan.

When considering debt consolidation, always begin by gaining a thorough understanding of your personal spending and saving habits. Then create a new plan that includes regular expense reduction, and continual savings and investments. Together reduced expenses and more savings can begin to generate the small amounts of cash you need to begin paying down your debts. Continued practice of good financial habits would not only help you be able to successfully complete a debt consolidation plan, but they will also help you navigate your way to a solid financial future free of debt.

Debt consolidation advice and information on what to consider when thinking that debt consolidation may be a smart thing to do is available online.


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