Debt and bill consolidation is a way of refinancing a number of debts into an easy to manage, monthly payment plan. Debt consolidation loans are in effect taking on a new debt be it from a family member, credit card, unsecured loan or home equity loan or line of credit. Lower payments and interest rates are the potential benefits, but there are pitfalls to beware of as well. Hiring a debt consolidation company to work with creditors to reduce interest rates and negotiate manageable payments is also an option that has both pros and cons.
Consolidating your bills may bring immediate relief, but it won’t fix the underlying problem, which is the existing debt. Payments and interest rates may be lower, but that doesn’t necessarily mean that consolidating is a wise fiscal move. It may be that the final cost of that loan will be higher than if the debt had been left alone. This is a draw back of bill consolidation services.
Zero percent credit card offers can be effective, if the no interest offer is over a long enough period to substantially pay down the balance. Too often, though, the fine print is overlooked. One late payment and the credit card company will begin charging the default rate, which can be as high as thirty percent or more. Understanding the difference between interest free and deferred interest is also important. Interest free should mean just that. Deferred interest means that at the end of the zero percent introductory period, any remaining balance may be charged interest from the date of the transfer.
An unsecured loan obtained for debt and bill consolidation is another option available for people who are looking for relief. These loans are generally structured to pay off the balance over a number of months or years, with the convenience of paying only one creditor instead of making several payments each month. Ideally, the interest rate for the loan is lower than credit card rates. However, because most of these loans are made by banks and credit unions, the rate is determined by the customer’s credit rating. People who are already knee deep in debt may not qualify.
Commonly, people will look to the equity in their homes as a means for debt and bill consolidation. Because of the decline in home values, this may no longer be an option for many homeowners. Even if the equity is there, it would be wise to think twice before tapping into it to ward off bankruptcy. The danger is if too many payments are missed, the home could go into foreclosure.
Hiring a debt consolidation company to negotiate with creditors for lower interest rates and payments is an option. Customers make their monthly payments and do not have to deal with creditors and collection agencies. Most debt bill consolidation companies offer free consultations, but do charge for services. Some also offer online bill consolidation services. Almost always, a debt and bill consolidation program will impact a person’s credit rating. There are reputable and dishonest companies offering debt and bill consolidation services. Buyers beware. Check out any company before contracting with them.
Debt and bill consolidation is the only option short of bankruptcy for many people. However, it would be wise to pay off as much as possible before taking on new debt or hiring a consolidation company to negotiate a payment plan. Liquidating assets such as retirement accounts, savings accounts and investments may alleviate the need for a consolidation program or loan. If a person is young and healthy, life insurance policies can be borrowed against or sold. Aggressively paying down the balance is what it will take to make any debt and bill consolidation plan successful.