Debt Consolidation

If you’re in a debt spiral, debt consolidation may be an effective method for managing your debts. Debt consolidation involves using new debt to pay off existing debt. When an individual consolidates debt, they will use credit to pay off multiple debts. Instead of multiple monthly payments to many different creditors, the individual will make one single payment.

Debt consolidation can be beneficial if you:

• Commit to not acquiring any new debt until the consolidated debt is paid off
• Don’t trade fixed rate debt for variable rate debt (Fixed rate means the interest rate is fixed for the life of the loan. Variable rate (also called adjustable rate) means the interest rate varies based upon prevailing interest rates.
• Lower the total amount of money you have to pay on your debts each month
• And if the interest rate on the new debt is lower than the rates on the consolidated debt

Debt consolidation advantages are: it can help you get out of debt faster and lower your current interest rates, and it can improve your credit rating. On the con side, debt consolidation can fuel unhealthy spending habits. Many consumers will consolidate their debt, only to find themselves in debt all over again due to the mismanagement of funds, poor spending habits, and carelessness about finances once the pressure to pay off old debt no longer exists.

Another disadvantage of debt consolidation is a debt consolidation entity may extend a loan with a less than ideal interest rate, and another is the potential for fraud. If you’re not careful, you can fall victim to one of the thousands of unscrupulous debt consolidation companies in existence today. Check to make sure the debt consolidation company is listed with The Association of Settlement Companies (TASC) or visit the Better Business Bureau to verify accreditation or check for complaints.

If you decide that debt consolidation is for you, there are several ways to consolidate your debt. You can:

• Get a bank loan
• Borrow from your retirement account
• Transfer high interest credit card debt to a lower interest rate credit card
• Borrow against your life insurance policy

The types of loans that may be available to you include debt consolidation loans, home equity loans, and loans to refinance your mortgage. Borrowing from your retirement account means that you will borrow from your 401(k) and pay back the loan over five years, with interest on the unpaid balance.

Transferring high interest credit card debt to a lower interest rate credit card is probably the easiest way to consolidate debt. However, it pays to read the fine print and ask questions. In some cases, a transfer offer may come with hidden fees and penalties, and the interest rate (on the transferred balance) can increase rather dramatically if you miss one payment -- even by one calendar day. Always ask the following questions before signing on the dotted line:

• What’s the interest rate and how long will it be in effect?
• What can I do to keep the interest rate low?
• Is there a balance transfer fee? How much?
• When will interest begin to accrue on the transferred debt?
• What is your balance computation method? (Some methods cost more than others)

If you plan to consolidate your debt by borrowing against your life insurance policy’s cash value there are no application fees or credit checks, and you won’t have to repay the money. You will have to pay certain fees, and if you die, the outstanding balance will be deducted from any policy proceeds.