Debt Consolidation: Get Your Debt Under Control

Halloween season is upon us, but nothing is quite so chilling or spooky as mounting money troubles. There are ways out of a current financial mess. Because of the state of the economy, some may not sure if some types of loans are still available. Sub-prime mortgages, for one, are not being handed out at the same rate as a few years ago, but what about debt consolidation loans?

Well, there's good news and bad news.

The good news is that you can still get a debt consolidation loan. The bad news is that it's harder to do so because lenders are more gun-shy given that they've lost money from bad credit loans in the past. But first, what can you do with debt consolidation? Basically, consolidation is a fancy word for "combination"--it's the process of combining all your debts into one large payment. Instead of having 5 different bills all with different interest rates, you get a loan to pay off all your debts and then pay off the loan with a single interest rate--potentially with lower interest payments than all of the other bills combined.

The thing about debt consolidation is that it can be a Catch-22. It's more than likely that you're having some trouble with your debt or you wouldn't be looking to consolidate. But those people with more debt --or, worse yet, missed payments--will have a harder time securing the loan.

The best route for debt consolidation is borrowing off the equity of your house. You get a big home equity loan, pay off your debts, and then pay off the equity loan. Unfortunately, this is not an avenue for a great number of people--i.e.; non-homeowners. Others can look to banks and credit unions, but be warned--stay away from any service with screaming headlines like "GET OUT OF DEBT OVERNIGHT!!!" A word of advice: the more exclamation points there are, the less a service can be trusted. This kind of lender will likely have so many fees tacked onto the loan that it can actually be more expensive than all of your bills separately.

What this means is that you have to:

1. Gather all of your loans together (including credit cards)
2. Figure out how much you're paying in interest combined
3. Measure different lenders' offers based on how much you'll be saving compared to paying bills individually

One other incredibly important item: once your bills are paid off, this can give you a false sense of freedom--i.e.; you'll see an empty credit card and want to go on a shopping spree. This is the worst thing you can do. If you get into debt trouble again, you could end up in a worse place than where you were before. Not only will you have the consolidation loan to pay off, but a slew of other bills as well. So a debt consolidation system should be done if your main intent is to be debt-free. This means exercising a fair amount of willpower to keep your spending under control while you're paying off the loan.

Note: Debt consolidation is not the same as debt settlement. Debt settlement is the process of negotiating your debt for a lower rate, but by paying it off all at once. For many borrowers, paying off thousands of dollars all at once isn't so feasible. A credit counselor will negotiate to have your debts lowered in addition to helping secure a consolidation loan. This sounds like the best of both worlds, but it has pitfalls as well in terms of fees and potential problems with defaulted payments (more about debt settlement, negotiation, and counseling in a future post).

In summary, debt consolidation can be a good program if you can secure a loan with good terms--but beyond the dollars and cents, a debt consolidation loan takes one major thing: discipline.

Has anyone out there participated in a debt consolidation program? Let us know about your experience in the comments.