Guide to Debt Consolidation
What is debt consolidation?
Debt consolidation is the act of combining the amounts of money you owe to creditors (like a credit card company) into one single debt. For example, if you have 5 credit cards, each with different interest rates and monthly payments, after you consolidate your debts, you would have one loan to pay back with one interest rate and one monthly payment.
Why should I consolidate my debt?
The main advantage to debt consolidation is to help you better manage your debt and pay it off faster. Usually, a consolidated loan that combines multiple debts has a lower interest rate than the average of all of your previous interest rates on the combined debts. This creates a lower monthly payment overall. In other words, if you had credit card #1 at 12% interest, credit card #2 at 10% interest and credit card #3 at 20% interest, the average interest rate is 14%. The consolidated debt could have an interest rate of 12%. If the total amount owed is $10,000, the monthly payment decreased by $200.
Where can I find reputable debt consolidation programs?
One good place to look is at your local credit unions. Often times they will be able to offer reasonable terms and rates, especially if you’ve been banking with them for awhile or have an affinity with them. Also large national banks could offer you a good program to win your business.
Who should consider this type of program?
If you have many credit cards or outstanding loans, a consolidated loan will make payment easier to combining your multiple payments into one. However, make sure you don’t fall into the trap of feeling like your debt is lower and therefore go spending money you don’t really have thereby digging yourself a bigger hole.
More Information
About.com - Debt Consolidation Programs