However, for at least half the population, looking at debt consolidation might not be for you.  Some people don’t need it.  Some people aren’t ready for it.  Some people are grasping at straws, and hence aren’t taking the time to do the research to find out what might be the best way for them to go.

The fact is that, for those people who need debt consolidation, it can be a boon if you choose the proper way to go.  If you have multiple credit cards with high interest every month and you can not only pay off all those balances at once, but also have a much lower interest rate, which puts more money in your pocket, that can be a good thing.

But it’s not all that simple.  There are responsibilities that come even with doing something like that.  Let’s take a look at reasons why someone might not need, or shouldn’t even think about, debt consolidation:

1.  You make enough money to pay all of your bills.  Many people get nervous when it feels like they can’t pay their bills.  However, all most people really need to learn is how to budget their money.  If you’re someone whose first thought when you get paid is how to spend it, then it’s possible you have the resources to pay your bills, just not the discipline to restrain yourself.  What you need to do first is do a quick list of how much your net pay is times two, estimating your monthly income, then a total of all your bills and their monthly payments.  If you have at least $300 a month more in income than your monthly bills, if you can learn how to budget you might be fine.

2.  You make enough money, but you have no discipline.  So you’ve determined you make enough money, but your interest payments are high and you’d like to consolidate your bills.  The problem is that if you’re a spendthrift, consolidating your bills is only going to get you in more trouble.

When one consolidates their bills, they have to be ready to stop exhibiting some of the bad habits they already have.  One quick way to do that is to stop using all except maybe one of your credit cards.  It does you no good to consolidate your bills, then build more debt on top of that.  If you don’t believe you can maintain discipline, don’t even think about debt consolidation.

3.  Are you good at researching what you’re looking to get into?  If you’re someone who’s sitting at home worried about paying your bills, and the first people you’re ready to call are the ones who are advertising their services on TV, and you’re ready to sign up with them without researching what they’re all about, you’re not ready for debt consolidation.  Just knowing that the recommendation of some of these companies is for you to stop paying your bills should be reason enough to want to learn more about some of these companies.

4.  If you’re making less than the amount your bills come to, debt consolidation isn’t for you.  There’s probably no way that you’ll be able to obtain a loan anyway, unless you put something up for collateral, and it’s possible that the amount that you get to put back into your pocket isn’t enough for you to live on without worrying about defaulting on your loan.  And the last people you want to ever default on are people from whom you’ve gotten a debt consolidation loan from, especially if they’ve tied it into your mortgage.

These are some things to consider before you decide to go forward with debt consolidation.  Every person must be honest with themselves if they don’t want to possibly hurt themselves even more in the future.

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.

Cut Your Debt in Half

In tough times, many more people are looking at debt consolidation as the way to go to help them get out of a financial bind.  Many of them decide to look at debt consolidation companies to help them.  Though there are some that might be reputable, many aren’t, and you will end up worse for wear than if you were going to do it yourself.

Here’s the basic premise of these “scam” debt consolidation companies.  They will look at all of your financial information, and if they accept you, which they almost always will.  At that point, you will have to pay them a fee, which can range from a flat fee of $500 to $1,000 most of the time, or a percentage of your outstanding debt, which can range from 10% to 15%.  That can be difficult if you were having problems paying your bills to begin with.

How will they help you find the money?  The first thing they will tell you is to stop paying on your credit cards and give the money to them.  What they’re going to do is build up a pool of money on your behalf, but of course this is going to put you behind with your credit card companies.  And, if you miss your payment to them, they have the right to take a percentage of the money they’ve been holding for you and closing out the deal you made with them, and you’re back to square one.

It’s actually their intention to get you into a collection status of some type so that they can negotiate a settlement that not only pays the creditors less money than what you owe, but they get a percentage of however much they’ve saved you in fees.  Of course, your credit rating takes a hit, but the debt is gone.  When they tell you that your debt will be paid in so many months, they’re doing that and building up your fund over that entire time so they can make a better negotiation with your creditors.  The lower your FICO score is, the better the deal they can make for you.

This won’t stop any of the phone calls or delinquent mailings you’ll be receiving for falling behind on your payments.  Your sense of relief is false, and it will affect your credit score in some fashion on the back end.  Remember, negative actions on your credit score will usually sit there for seven years.

What you end up paying for is someone to handle services you might be able to handle on your own.  Calling up your creditors and asking for more time or a short term deal is a much better way to go, especially if you have hopes that your status will change for the better in a little while.  And even if you’re not sure it will, you will still buy yourself some time and breathing room, which helps you think about other options that are hard to come up with when you’re stressed.

There are many components to debt consolidation that people need to do research and be aware of both the benefits and the dangers that may come.  Not reviewing either could end up costing more money, and hurting your status more, in the long term.

Debt settlement is often referred to as debt arbitration or debt negotiation. This process is used by individuals to reduce their debt to the lender by a mutual agreement between the debtor and creditor, which often reduces the balance owed. The key to negotiating a debt settlement is to hire a debt consolidation lawyer to act on the lendee’s behalf. Consumers who continue to make their minimum monthly payments will not be allowed to settle their debt from the lender. Experts advise consumers to seek out a lawyer or debt consolidation firm that only charges after a settlement is made.

Resources:

Mortgage Reduction Techniques – Debt Settlement vs Debt Consolidation for Help with Card Debt

Debt negotiation is when the consumer’s lenders are contacted and asked to lower the total amount owed. Buyer beware, because many consumers have been taken advantage of by companies who offer this service. Many cases have been documented where the consumer’s debt negotiation company simply took the money and never contacted the lenders; causing the debtor to fall into even worse standing with their lenders.

Debt elimination offers are often schemes used to convince the consumer that their current lines of credit are in fact illegal agreements. A debt elimination company will often charge an upfront fee to supply a legal document to the lender which supposedly absolves the consumer of the monies owed. This service is basically a waste of time and money, as the documentation has no bearing on the debt owed.

Resources:

Intermex Power – BBB on Differences Between Debt Consolidation, Debt Negotiation, and Debt Elimination Plans