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Get The Facts Right: When Debt Consolidation Makes Sense For You

Tuesday, August 4th, 2015

Talking about debt consolidation in general, without particularizing each case is neither helpful nor practical, so this article aims to clear a misconception: that consolidation at any price is the solution for your debt problem.

What Does It Actually Mean?

The concept of debt consolidation loans, in their true and original form, means finding a lender who will pay off several other debts that you have, for instance, on your credit card, car loan and so on. Thus, you now have only one payment obligation per month, instead of three or four.

There are several advantages to this practice:

• You do not have to worry about forgetting to pay one of the installments;
• The overall interest rate for the consolidated loan is smaller than the aggregated interests on your previous loans;
• The consolidation loan usually has lower monthly payment than the total you used to pay for the separate loans.

When Debt Consolidation Does Not Solve Your Problem

There are some situations when you cannot solve your financial troubles by getting a consolidation loan. Most frequently these situations occur when people wait until the last possible moment to refinance loans they can no longer afford to pay. If you have waited for months, have fallen behind with payments and accumulated debts in the range of thousands of dollars, lenders will become very wary about granting you a new loan (http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/).

In most of the cases, they will ask you to bring collateral, such as a car or other valuable assets. Otherwise, the interest rate on the loan will be very high, adding the credit risk to the other fees. Commercial banks will reject your application, in most of the cases; as for credit union, you have to be a member of good standing to get approved for a loan.

How to Consolidate Your Debts Smartly

You need to act and find a solution as soon as you realize that your finances are strained. Do not wait to get too deep in debt and have a subprime credit score. Seek financial counseling if money issues are too difficult for you to grasp.

Lenders will ask for proof of your solvability and reliability in repaying your loan, so it is important to have a good history of paying your utility bills and credit cards. If you can convince your potential creditors that you are a prudential person who wishes to minimize payments for various loans, then you will be offered a debt consolidation with affordable terms and conditions.