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Do you know how much debt you have?  Are you looking for a way out of it?

Many people are buried in debt these days and are looking for a way to lessen their financial obligations. Some people aren’t in as much trouble as they think they are, whereas some are much worse off than they know.  Regardless of how you currently sit regarding  debt, if you’re thinking about doing some kind of debt consolidation, you’ll be better of knowing some of the terms and rules that you might end up running into.

But first things first, you need to get over the fear of working on reducing your debt and determine if you’re in big trouble, a little bit of trouble, or no trouble.  Knowing this will help determine what kind and how much help you need.

For instance, if you’re in little trouble a few reductions in monthly expenditures and a clear system for paying down your debt may be the answer to a better future. If you’re in a little more trouble, a debt consolidation loan might be the way to go.  A debt consolidation loan can be in the form of a line of credit or an actual bank loan.  The determination will be if you’ll have enough money after obtaining the loan to still pay your bills and have some kind of life.

If you’re going to be able to go for a debt consolidation loan, and you don’t go for the line of credit, then you should shop around for the best deal you can get.  Usually credit unions will offer the best deals, but some credit unions make you join them, or have a relative who’s a member.  Often, your own bank will be easier on you if you’ve had a good relationship with them over a number of years.

There are two different kinds of loans, and you need to know these terms.  One is a “secured” loan, which means taking a determination of your assets against your debts and using your assets as collateral against your loan.

The other is known as an “unsecured”, or “non-secured” loan.  This usually means they don’t look all that hard at your assets, but your interest rate will be much higher than with a secured loan.  If the interest rate is still much lower than what your outstanding debt is, then you might still be ahead in the end.

For both of these, it’s possible that you may not get the amount of the loan that you’re looking to get.  That’s something else you’ll have to think about to see if the loan is worth taking.

These are only a few of the things you’ll have to be wary of if you’re going to go through with debt consolidation.  Always remember to do your research before you decide to go any route.

See Also:

Secured Loans on About.com

The first part, of course, should be in taking a look at what your debt load is to first determine if you have the chance to qualify for a loan.  If you’re making less money than your bills by a significant amount, don’t bother putting in for a debt consolidation loan, because not only will you not qualify, but it could result in a negative statement on your credit report.

The same goes for trying to roll your debt into a home line of credit.  The restrictions for obtaining a line of credit are tougher than getting a loan, and often mortgage companies will recommend a loan rather than giving you a line of credit.  In this case, you might not qualify for either.

If you’re making more money than your monthly debt, even 10% more, you might have a chance to obtain a debt consolidation loan.  That will reduce the amount of your payments, putting more money into your pocket, but you’ll have to make sure that you not only keep up with those payments, as penalties for missing payments can be harsh.

Once you’ve made the decision, based on the figures, that you want to go for a debt consolidation loan, you need to determine where you want to go for that loan.  It’s easy to shop online for the best interest rate, but often your best bet is going to a place where you already have some kind of record, such as the bank or credit union where you already have a checking or savings account, or wherever you make mortgage payments.  They’re usually more willing to work with you in getting something.

Next, you need to know the terms “secured” and “unsecured” or “non-secured” loans.  A secured loan means they’re going to take what your assets are and use them as a lien against your possibly missing payments or defaulting on your loan.  An unsecured loan means they’re not going to take your assets into consideration, but your interest rates and fees will be much higher.

For both of these, you may not get the amount of loan that you’re looking for, and you need to be prepared for this information.  If a loan isn’t going to take care of the worst of your issues, or your interest rates on most of your outstanding debt is lower than what a potential new creditor might offer, getting a loan to consolidate your debt doesn’t make sense.

Then it’s time to go through the grind of the paperwork, and this can not only take awhile, but it can feel invasive.  Most of us aren’t usually going around telling everyone how much our debt is and how much money we make, but you will have to answer these questions are more.

Reputable loan officers aren’t going to take any chances in giving loans to people who they feel might default on them, and they’re going to dig deep into both the numbers and your patterns.  They’re going to make you prove your income by giving them tax statements for at least two years back, sometimes four.  They’re going to ask you about your jewelry, furniture, and other things within your household.  They’re going to ask your permission to take a look at your credit report.  If you go this route, you need to be ready for these types of things.

And, in the end, there’s no guarantee that you’ll even get a loan.  Be prepared for that also, especially in these tough economic times, because you might be left with only three options then: trying to work with your creditors; defaulting in payments and hurting your credit standing; declaring bankruptcy, which isn’t as easy as it used to be, but can help alleviate your present standing while hurting your credit for up to seven years.

It’s important to know not only what your debt consolidation options are, but some of the potential issues that could come up.  The process can be rough, and it might not turn out the way you’re hoping, but it could be the beginning of your financial health starting to recover and receiving financial relief.

* line of credit – this is mostly associated with home ownership, with a line  of credit, your basically getting a loan which is secured by the equity that you’ve built in your home. The line of credit is a second mortgage and typically has a lower interest rate than other loans, be sure that you get a fixed interest rate so your payment is locked and won’t increase with every rate jump.

*  bank loan – this may  be your best option for debt consolidation, especially if you have no equity in your home, and you can shop around for a loan with the best rate and term options.  The problem is that if you get turned down for a bank loan, it shows up on your credit report as an inquiry and may leave a negative footprint on your report, so make sure your financial situation would allow you to qualify for a personal bank loan before you apply. Many banks can do a preliminary review for you without risking your credit score.

*  debt consolidation company – there are a number of companies that offer their services in helping you pay down your debt.  In this case, they’re actually doing a service that you might possibly be able to do for yourself.  They will negotiate payment rates with your creditors and pay these bills for you.  They set up a payment arrangement with you to charge you a certain percentage of the total of the monthly payment they’ll make for you, and sometimes get money back from your creditors for helping to negotiate the rates

*  credit counseling – in most cases these are government sponsored organizations that will help you look at your debt and make recommendations on which way to go.  Sometimes, if your debt is high enough, they’ll help you make arrangements with your creditors to get them paid, and charge you a small fee for the service.  Other times, they’ll either give you some ideas for how to reduce your debt load, or recommend bankruptcy.  Many times, the services they offer are free and because of this, they are the best place to start searching for a solution.

Deciding on the best way to consolidate your debt is important. Do a lot of online research and look into any non-profit counseling services before looking at “paid” consolidation options. You may not need to pay a company to do something you can get done yourself. A little research, dedication and sacrifice can go along way in your journey for financial freedom. That said, there are several companies that offer incredible services, so if you find that debt counseling services and online research are not enough, don’t be afraid to contact a company for help.

This sounds like a good idea, because having too much debt is scary, and with all the different interest rates sometimes it feels like you can’t get close to paying off all of your bills. At the same time, even debt consolidation isn’t for everyone.

If you’ve ever wondered if debt consolidation is for you, the benefits and negatives of debt consolidation below can help you with your assessment.

Here are some of the benefits of debt consolidation:

*you learn just how much debt you’re in and what needs to be done to reduce your debt

*often, you have one company that you make your payments to

*you have the opportunity to pay off all of your debt quicker and realize financial freedom

*your interest rate will probably be lower than most of your other debt

*your mind can be eased because you’ll have more money to spend in other ways

Here are some negatives of debt consolidation:

*you have to make sure you keep to your payment schedule; missing a payment will hinder any progress

*you have to make sure you don’t create new debt while you’re paying down the consolidated loan

*sometimes a condition of obtaining a consolidation loan is that you have to give up all credit cards

*not all outstanding debt is allowed to be considered

*you might have to be dependent upon someone else paying your bills on time

*if you still can’t pay all your other bills, debt consolidation may not be for you

Reduced Interest Rates – Interest charges on high interest rate credit cards make it difficult to pay down your balances. If you make your minimum monthly payments each month, most of the amount is interest payments and a very small amount of your payment actual goes to reducing your balance. A majority of debt consolidation loans are home equity lines of credit, which are secured loans that usually have a lower interest rate. If you consolidate your debt into one loan and you are paying less interest, you can continue to pay the same amount as you have been, but now more money goes towards your principal.

Tax Breaks – If you pay interest on credit cards, you are throwing money away each month and you are not able to write those credit card payments off at the end of the year. However, if you consolidate your debt into a home equity line of credit (a second mortgage), you can write off the interest paid on your second mortgage, which gives you a tax break each year.

One Payment Each Month – Most Americans have more than 10 credit cards and have to manage a payment to each credit card each month. If you consolidate your debt, you will typically end up with one or two lines of credit, which makes it a lot easier to manage your monthly payments.

Lower Monthly Payment Obligations – If you consolidate your debt, you will have fewer creditors and lower interest rates so your monthly financial obligations will be less each month. This means that if you continue to pay what you currently pay, more money will be used each month to pay down your balances.

If you’re ready to get started with consolidating your debt and are unsure how to get started, read this article for information about contacting a non-profit debt consolidation company. These companies will be able to help you get started on a customized plan that meets your needs.

Reduce Monthly Payments – In most cases, a debt consolidation loan allows you to reduce your monthly payments because you’re eliminating higher interest rate payments. You get rid of all the high interest rate credit lines you currently have, and combine your debt into lower interest rate loans.

More Manageable Monthly Payments – By consolidating your debt into fewer credit lines (ideally 1), you get rid of several credit cards and set up a situation that allows you to pay 1 large payment to 1 creditor. Instead of paying bills at different times each month, you’ll most likely only pay 1 bill, 1 time each month. In some cases, you may discover a program that allows bi-monthly payments; this allows you to pay less in interest over the life of the loan because you decrease your balance two times per month; a plan that allows bi-monthly payments will make a huge difference over the life of a loan.

Fewer Credit Lines – By getting rid of balances on several different credit cards and other lines of credit, you can start canceling credit lines that you no longer need. In most cases, this is viewed positively on your credit score because you have fewer accounts open and usually access to less credit. Creditors won’t worry as much about you getting further into debt because your available credit is decreased overall.

It’s Easier to See Your Debt Vanish – By consolidating your current lines of credit into fewer credit lines, you have a clear picture each month of how much you’re paying off. You’ll easily be able to see that minimum monthly payments do nothing and that larger payments make a huge difference. This will help you stay focused and committed to a debt free future.

For information about developing a plan to consolidate credit card debt, see our article on Credit Card Debt Consolidation Tips.