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| Should I Resort To Debt Consolidation? |
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| This is a question that is often asked to our experts and should be of common knowledge. Debt consolidation works under certain situations. The type of debt that you have will determine whether it is advisable to resort to debt consolidation or not. |
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| There are different types of debt: There are secured forms of financing like mortgage loans and home equity loans or lines of credit and unsecured forms of financing like personal unsecured loans, cash advance loans, payday loans, student loans, credit cards, store cards, etc. |
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| Also, the interest rate charged for financing can be subsidized or unsubsidized: Examples of subsidized interest rate loans are home loans for first time home buyers and certain student loans. These loans charge lower interest rates because either the government or a private institution pays for part of the costs of financing thus letting the lender to charge lower interests for the money lent. |
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| These differences are important because they will determine which kind of debt should be consolidated and which one not. Though almost all debt can be paid off in advance (even those that charge a penalty fee for prepayment), it is not always advisable to do so as it may turn out more expensive. The key to debt consolidation is to exchange expensive debt payments with a single and more affordable monthly payment. |
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| What Debt Should Be Consolidated? |
| Debt consolidation is usually meant for saving money when the amount of funds you spend on interests due to accumulated debt turns asphyxiating. It makes no sense to replace advantageous terms with worst terms that will imply adding up to your overall debt. Thus, debt should be consolidated when the terms that you’ll obtain by resorting to debt consolidation can be more advantageous than those that you already have. |
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| There is however an exception to this rule, and it occurs when the borrower needs to reduce the amount of his debt monthly payments and thus is willing to exchange cheaper debt for a more expensive financial program that is long enough so the resulting installments are low and affordable. You pay more money in the long run but less each month over a longer period. |
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| Secured Financing And Subsidized loans are usually not the kind of loan you would include for consolidation. On the other hand, payday loans, cash advance loans, unsecured personal loans of all kinds, car loans and credit card debt tend to be included in debt consolidation programs. Let’s see an example of debt structure suitable for consolidation: |
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| Type Of Debt |
Amount |
Percentage |
| Credit Card Debt |
$9000 |
53% |
| Car Loan Debt |
$4500 |
24% |
| Payday Loans |
$1000 |
9% |
| Store Card Debt |
$2500 |
14% |
| Overall Debt |
$17000 |
100% |
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| Debt Amount Before Consolidation |
Debt Amount After Consolidation |
Total Savings |
| $17000 |
$6800 |
$10200 |
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| The above debt has an interest rate that will average a 12% APR which implies annual interests at the current state of $2040. |
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| With debt consolidation and negotiation techniques an agent can reduce your debt by up to 60%. This implies huge savings both on your overall debt and on the resulting monthly payments that you will be able to obtain. Thus, it will free up your income so you can use the money for other purposes. |
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