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What you need to know about debt consolidation

by , 10 July 2014

If you're struggling with debt, perhaps debt consolidation has crossed your mind as a viable solution.

Debt consolidation advertisements are everywhere - you can't miss them. However, you should be aware that there are many scammers out there who pretend to make your debts magically disappear in exchange for your last money. Don't fall into their trap!

Debt consolidation is by no means a magical solution that clears you of debt. It's actually another debt - that's what debt consolidation is really about: taking more debt to pay off your existing one.

Before you take into consideration debt consolidation as a solution to your money problems, let's take a look at what it really means.

Debt consolidation – will it solve all your financial problems?
 
Debt consolidation usually means combining all your debts under one single debt. You get a bank loan used to pay off all your debts.
 
There are several types of debt consolidation, including bank loans, home equity loans or student loans.
 
There are two options for loans: secured loans and unsecured loans. Secured loans involve using your house, car or other valuables as collateral. If you cannot make the payments, then the bank can take away your assets. Companies are willing to offer lower interest rates for secure loans
 
Unsecured loans only use the debtor’s credit to get the loan. It usually involves higher interest rates.
 
You can obtain a loan from a bank or a finance company. It’s better to go to a bank, but if a bank won’t help you, then you can apply for a loan with a finance company. Finance companies usually charge higher interest rates, since they take on people with bad credit.
 
Debt consolidation should help you get rid of debt. Remember that this is not a magical solution, it’s actually more debt. If you don’t analyze your financial situation carefully and determine why you got into debt in the first place, you’re likely to make the same mistakes again and get into even more debt.
 
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Main benefits of debt consolidation:
 
- lower interest rates and lower monthly payments;
- you can manage debt more easily.
 
Stay away from companies that promise to make your debt magically disappear. That simply doesn’t happen. There are many scammers who will ask for money upfront in exchange for their debt consolidation services.

You should seek financial assistance from a professional and only make a decision after carefully researching the company. Read the fine print for hidden fees and extra costs.



What you need to know about debt consolidation
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