Debt consolidation is the process of reorganizing multiple high interest debts into a single monthly payment. If you are thinking about consolidating your debts, there are a few options you can consider.
One way of consolidating your debts is to borrow money to pay off the debts. At a first glance, this may seem counterproductive as you are just replacing debt with debt, but if you have multiple debts with different providers and services, such as five different credit cards, your stress levels will reduce as you can focus your energy on meeting one single payment on a large loan, rather than a mountain of letters coming through your door every month asking you for payment for different items. A major pro with this idea is that the interest rate on the big loan can often be lower than the respective interest rates on your multiple debts, so you end up paying less back. However, to qualify for such a loan you may have to put up collateral like your house which could be repossessed if repayments aren’t met. Borrowing to cover the debt also creates a false sense of security, as you think you only have one ‘source’ of debt, and you can often overlook the size of the debt – remember that using this method the debt is only ever restructured, not eliminated.
Another option is to use a debt consolidation service or go for consumer credit counseling; both these types of organizations will assist you in restructuring your debts. The company you choose to help you should be non-profit (as all reputable consumer credit counseling services are) and registered with the Association of Independent Consumer Credit Counseling Agencies (AICCCA). These organizations will have close links with major credit providers and will help you renegotiate your credit terms with your creditors. The advantage of using one of these services is that your monthly repayments will be instantly decreased and debt collection actions (such as possible repossession of belongings) will be reduced. They will also negotiate fairer interest rates and fees for you, and along the way will pass on good money management tips and techniques to ensure that you don’t end up with a serious debt problem again. However, if you do decide to use a consolidation service you may find that creditors are unwilling to lend to you in the future as your credit score is sometimes negatively affected by the use of such services, and it may be a term of lending for some credit providers not to give credit to someone using a consolidation service. It is also worth bearing in mind that this particular type of consolidation only works for unsecured debts, and be wary of some debt consolidation companies that are not accredited with AICCCA and may charge large fees for their services.
The option you choose depends on a number of factors including, but not limited to, your personal situation, your level of financial ability, your credit rating and your earning capability. If you feel that you can manage your debts on your own you may be quite happy to borrow to consolidate, but if you have very large debts and have difficulty understanding financial products, a consolidation service is probably best for you.