Debt Consolidation: The Secret To Deciding What’s Best For You

Debt consolidation can be a great help, but make sure to ask a lot of questions and read the fine print. 

You may want to cautiously consider a debt consolidation service if you’re like many other Americans who have found themselves mired in debt. Sometimes it happens from bad spending habits and sometimes there are emergencies. It can just somehow creep up on you and if you’re having trouble repaying your debt, you’re not alone. Unfortunately, this kind of situation also leads to difficulties that simply snowball, because when you can’t repay the original debt, you get hit with interest charges and other penalties, which makes it even harder to repay the debt.  The longer you put it off; however, the more your interest and penalty charges grow and grow. 

One of the many ways you can handle this is to use debt consolidation.  Indeed, this has seemed like the way out for many, and the way back to financial security.  However, there are benefits and drawbacks to debt consolidation, no matter how you do it.  You need to be aware of what the benefits and drawbacks are so that you can decide whether it’s best for you. You should also ask a lot of questions when consulting a debt consolidation service. 

When you talk with a debt consolidator, just remember, they have products (debt consolidation packages) they want to sell you. They will make these sound so good to you, just check out the fine print. One time I was looking into this prospect and it was my second or third conversation before I found out they had a type of closing fee set up that would have cost me about $5,000. A debt consolidation service can possibly really help you out, just be cautious. First, let’s define the term “debt consolidation.”  It’s really just a simple setup wherein your multiple debts are rolled into one lump-sum debt and you make a single payment every month to a single creditor.  

Indeed, this can be helpful, but for it to truly be of benefit to you, it has to save you money in the long run.  It isn’t just that you’re paying money to one creditor, because in this day in age, online bill paying makes bill paying painless anyway.  You aren’t even spending more on postage stamps by paying three creditors instead of one.  What, then, is the benefit? 

Debt consolidation is beneficial if it: lowers your total monthly payment, lowers the amount of total interest you pay, and/or your actual total debt drops as a result of the consolidation. To make sure at least one of these things takes place when you consolidate, you have to plan carefully. 

If the consolidation is ideal, you get all three benefits from your consolidation.  This is rare, but it can happen.  Most often what happens is that your monthly payments get lower.  This can benefit you because you pay less on a monthly basis, which frees up money for you to pay other things.  And if you’re struggling with debt, it’s likely that your monthly income is limited, so this is of benefit to you.  You’re also much more likely to be able to make the payment every month. 

This is helpful for a couple of reasons.  Number one, it gives you a sense of accomplishment, since you are becoming responsible and are becoming able to pay your bills on time.  The simple act of paying your bills on time is a positive self-fulfilling prophecy that can increase your success later. Number two, since you are struggling with debt, is likely that your monthly income is limited, so a smaller payment will leave you enough money to meet other obligations, such as rent and food. 

What can become difficult with this is that if your monthly payment is too low, you can be lulled into a false sense of security so that some of the drive that perhaps caused you to incur debt in the first place (such as excessive shopping) can rear its ugly head again, since you think you have enough money to “splurge a little.”  And of course, the idea here is to dispense with that kind of behavior and learn differently, not to encourage it. 

The lower payment plans can have drawbacks as well because in some cases, a lower payment simply means more payments over a long period of time, rather than higher payments over a shorter period of time.  This means that you pay more interest and ultimately more money on your debt.  Of course, this is fair, since the lender is waiting a longer period of time to get his or her money back, but the drawback to you is that you end up paying more on your debt than you would if you paid it off over a shorter period of time.  One way to go around this is to try to get the lender to settle for a smaller amount than what you owe.  After all, many lenders know that something is better than nothing, so trying to negotiate for a portion of the original debt is better than nothing at all.  Once you have agreed on a plan and the payment amount per month, make sure you stick to it and hold up your end of the bargain. 

Basically, paying off your debt is like losing weight.  It takes consistency, commitment, and a long-term goal, done slowly over time.  Just as you don’t gain 50 pounds overnight, neither do you get yourself $25,000 in debt overnight.  Slow and steady is the key to checking out a debt consolidation service, paying off your debt and becoming financially secure once again.