Debt Consolidation

What is debt consolidation?

Debt consolidation is the process of borrowing money to repay your debts. The concept sounds strange to most people. How can I borrow money to repay my debts? What's the point?

It is true that initially debt consolidation does not reduce the total amount you owe. You are simply replacing a few debts with one larger debt. Here's an example:

Example: Your total debt is $20,000 owing to five different credit cards. The average interest rate on your credit cards is 19% per year, so you are paying almost $317 in interest every month on your credit cards, and that does not include any repayments of principal. You have a good job and good income, so you go to your bank and negotiate a loan where you pay the debt off over five years. Because it's a loan and not a credit card, the bank charges you an interest rate of 8%. Now your monthly interest payments are less than $134 per month, and the interest goes down each month because you are actually repaying your debts!

That's the power of a debt consolidation loan. You borrow at a lower rate, to repay higher interest rate debts.

If you own a home, the numbers are even better, because with a home as security your interest rate may only be, say, 6%. You save even more money. (Read our articles on Getting a Mortgage to Pay off your Debts and on Three ways to borrow against your house as a bankruptcy alternative).

When is a debt consolidation loan a good alternative to bankruptcy?

First, reasearch your options. Sites such as www.debt-consolidation-loans-information.com provide useful information on debt consolidation loans as a bankruptcy alternative. (They even have a free debt consolidation loan calculator to determine how much a debt consolidation loan will cost). A debt consolidation loan makes sense if you have high interest rate debts, such as credit cards and finance company loans, and you have the ability to borrow at a lower rate. To qualify for a debt consolidation loan the lender will want proof that you have a good job with good income to prove you can repay the loan.

Outside security, such as a car or a house, will make it easier to qualify for a debt consolidation loan, and you will qualify for a lower interest rate.

A word of caution: Don't be tricked into getting a high interest rate debt consolidation loan at a finance company just because the monthly payment seems lower. Some finance companies will take your 19% interest credit cards and lend you money at 30% to pay them off, but because they stretch your loan payments out over 10 years, you are paying slightly less each month. Don't fall for that trick. Over the ten year term of the loan you will pay a huge amount; it's not worth it.

Debt consolidation loans are one of the best bankruptcy alternatives for people with a good job who can afford to repay their debts over a reasonable period of time.

There are other options, such as consumer debt consolidation services through organizations such as MyCDC.org. MyCDC utilizes services that will consolidate debts without the need of a loan. These programs will consolidate debts by negotiating with creditors to get YOU a lower repayment amount without the RISK of any type of debt consolidation loan.