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Eliminate Your Debt Burden With Debt Consolidation

Aug 17, 2007
Debt is a burden most consumers struggle with on a daily basis. The approach we take in dealing with this burden is what separates us as individuals. Choosing the correct way is a personal choice involving, among other things; family discussion, best interest rate research, and visitation with a debt management or debt consolidation professional.

There are two distinct ways to deal with consumer debt. First, you may want to consider reducing the principal balance on a current loan, or even take this step with multiple loans. Paying a bit more than the minimum required and having that amount applied to the principal is one small way to reduce debt in the long run. It may be wise to look into the specific loans you have, take a close look at your budget, then see if there are ways to reduce the amounts owed on the various loans.

Another very popular option is debt consolidation. With debt consolidation, you can reduce your monthly payments by placing several loans under one all-purpose consolidation loan agreement with one lender. In addition to simplifying expenses and optimizing your budget, reducing your payment can help your overall credit profile, since debt burden is measured by comparing your loan payment as a percentage in relation to your total income.

Debt (the amount of money owed to a bank, credit union or individual lender) is composed of just a few pieces. Simply put, debt is calculated by the amount borrowed, plus the interest charged for the privilege of borrowing said money, and usually some final additional administration and bookkeeping charges. Tip: Be sure to include changes in interest and additional finance charges when figuring the cost of new loans and/or consolidation loans.

When considering debt consolidation in any situation it is best to also understand the difference between secured debt, such as home mortgage loans, and unsecured debt, such as credit card bills. With the original loans or a consolidation loan, if you are able to make the payments and don't have trouble with late-payment penalties, you are managing your debt fairly well. But if you miss payments, the lender will have to take some action.

It is at this point that the difference between a secured loan and an unsecured loan can be crucial. With a secured loan, the lender may be able to take your property if you don't keep up with payments according to the agreement. Most lenders are willing to work with you if they believe you are acting in good faith. A lender may even be willing to reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total to get back on track.

If you have unsecured loans, your credit rating will suffer and you will not be able to get future credit or loans easily. But, since there is no collateral to take, the debt may be discharged if your financial problems lead to bankruptcy. This certainly does not mean that unsecured debt is the best way to go. In fact, to get unsecured personal loans you will have to have an extremely good credit history and, generally, proof of sufficient income. Making the choice between a secured loan and an unsecured loan depends entirely on the individual situation and be considered carefully.

There are other bumps in the debt consolidation road that can cause trouble if they are not understood from the beginning. The existence of several loans with high interest rates may lead you to think that debt consolidation is an easy answer. But keep in mind that lenders offering debt consolidation may charge high interest rates and significant late-payment penalties for those who already have trouble keeping up with current payments. (This may be necessary precisely because consolidators are working with problem borrowers.) With one high interest rate rather than two or three your monthly payment is lower but, in the long run, you pay more in total.

One of the key reasons for consolidating debt in recent years has been the rise in credit card debt, which often comes with interest rates that are considerably higher than with other loans, mortgages etc. People can build credit card debt because they spend more than their income, buying luxury items (or even things they feel are necessary), hoping to be able to pay off the amount borrowed with future earnings.

Debt consolidation can help in many cases, though a change in spending habits is advisable so that new credit card debt is avoided in the future. In fact, almost every reputable debt management counselor will advise treating the real cause of debt problems; the lax underlying spending and saving habits of its customers. To most of these professionals, debt is a symptom of other problems that must first be addressed.

If you have built up a lot of credit card debt or your particular situation has made it necessary to get two or more loans (and you want to simplify things with one monthly payment), personal property such as a home or car may allow you to get a lower interest rate. Using a home or other valuable property as collateral allows you to work with a bank or other lender to get a secured loan. In some cases, the total interest and the total cash flow paid towards the debt is lower, allowing the debt to be paid off sooner, incurring less interest. Because the property is a "guarantee" for the loan, the lender may offer a lower interest rate, more agreeable payment schedule and fewer extra fees and charges. (However, keep in mind the difference between secured and unsecured loans.)

Any debt consolidation plan, whether it is a home equity loan, unsecured loan with a credit card company or even a personal loan, can add to debt problems rather than help solve these same problems. That is why it is very important to take time, from the beginning, to figure all the costs for the entire period of any loan. Debt consolidation can be the answer to financial problems, if it is managed properly in the correct situation.

Getting out of debt is not easy, but you can do it, you just need a plan.
About the Author
Casey Markee is a consultant with nationwide debt management program provider Consumers Alliance Processing Corporation (CAPC). Visit them online for a free debt consolidation quote to eliminate your consumer debt today.
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