Debt Consolidation

Benefits and Drawbacks of
Debt Consolidation

Many people begin debt consolidation by securing a second mortgage, a home equity line of credit (HELOC), or another form of bank loan. You need to be very careful when doing this.  You do not want to turn around and charge up credit cards yet again because you will then have the debt consolidation loan and credit card debt to repay.

Take advantage of the money from the consolidation loan.  Try to use it to negotiate with creditors. Try negotiating with creditors to remove a late charge or drop some interest.  You can save a little bit, which will help you reach your goal quicker.  Plus consider offering a lump sum payment to settle the outstanding balance.  The offer may be considered by the creditor to be stronger than waiting for a stream of payments to materialize.  (The difference between the settlement amount and the outstanding balance may be a taxable event.  Consult with your tax advisor before you negotiate a settlement.)  Be sure to not use the accounts once you have paid them off.

If you cannot get a bank consolidation loan with a lower interest rate than you are paying on the debt you would like to eliminate, you may want to start reducing your debt and try improving your credit score so you qualify for a better loan in a few months. Try negotiating with creditors for lower interest rates.  Try paying bills a few days early if possible. Any interest you save will help you attain your goal sooner.

If the creditor allows extra payments, try sending extra payments to one of your bills.  Choose one bill and focus all of your extra payments on it until it is paid off.  Then choose another bill.  Consistently combine the required payment with any additional amount available until the balances you have decided to reduce have been eliminated. After six months, your credit score should be higher and your debt load should be lower.  You then may be able to get a better interest rate on a bank consolidation loan.  The key to your success is to lower your indebtedness and find the best terms and rates available given your credit situation.