There was a time when debt consolidation related to very limited range of products, most commonly the consolidation loan. There would be adverts everywhere encouraging people to move all their debts under the one umbrella of a consolidation loan and for the most part, this was a positive move, at least in theory, and when used correctly.
The goal is ultimately to consolidate high-interest balances into one manageable and less costly package, as the title says one loan to rule them all. But there are pros and cons to such an agreement that are important to know. Also, while consolidation loans in their heyday took up all the media attention and advertising, there are alternative forms of consolidation and it is important to know what’s out there to make sure you get the right product, to protect your ‘precious’ assets and not be lead down a dark path to Mount Doom.
Know what you are getting yourself into
(Sam, please tell me you read the small print)
Understand this. Consolidating debt provides you nothing more than a relief to the symptoms of debt and is not in itself a cure. The whole concept feeds upon the financial tendencies that landed you in trouble in the first place. The appeal with consolidation, at least in the form of a loan, is that you can benefit from a more attractive interest rate for your debt. However, this isn’t always how it works out. In truth, if you've taken on so much debt that you're now exploring the option of taking on more as a solution, the chances of you qualifying for the very low interest rates that attracted you in the first place are very slim. Those rates are for the most part reserved for those with exemplary credit ratings and low risk.
Not to put too much of a downer on the concept there are occasions when a consolidation loan is absolutely an appropriate solution to debt problems. Such as:
-
Consolidating many small amounts of debt that each have high interest rates, such as store cards or credit cards that have had a 0% interest rate expire leaving you with an extortionate interest rate.
-
Where doing so reduces your monthly payment to an amount that allows you to comfortably meet your monthly living costs without extending the payment period to an unreasonable timeframe.
Before you commit to any form of consolidation, be sure that the costs of the new loan will be less than what you're already paying various creditors. While most offer lower rates than your expensive cards and debts the period of repayment is usually extended and as such, you can still end up paying more over the long term. If you need to do this to make the repayments affordable then fair enough but be aware that it can end up costing more.
Also, don’t forget to shop around, and not just with your bank or traditional creditors. You might just find if there is a local Credit Union that they can provide better terms.
Alternatives to the Consolidation Loan – Thinking outside the box
(Sometimes the best alternatives are not always the obvious ones)
While Consolidation Loans are the most common product with this type of debt relief, there are alternatives. Some of these are obvious and some require thinking a little differently. Of the obvious variety are for example, Zero Rate credit cards.
Companies offer these rates as ‘introductory offers’ or hooks to entice for you to switch to their card. If you are able to take advantage of such a card then this is a great way to pay off debt in an interest free environment. However, these rates, again, are usually reserved for those with good credit. Often, the rate also only remains on offer as long as your payments are on time. Also, when the introductory period is over, you may often find that the interest rate then hikes up again. In order to keep paying off your debt at 0% interest over an extended period of time, you need to keep changing card to 0% offers and there is no guarantee of course that lenders will keep offering that rate. In addition to this, opening new lines of credit every six months could also have an adverse effect on your credit rating. So there are pros and cons with this type of consolidation approach.
Credit Unions are also a good alternative to your traditional bank consolidation loans. Often, Credit Unions offer fairer terms and policies, providing a more affordable source of consolidation. Again there are no guarantees that you will be accepted but if you need to consolidate it is always worth seeing if you can approach a Credit Union.
Dwarves in a casting call? (now that’s thinking outside the box)
Finally, and this is thinking outside the box, you may wish to think about how to earn more money rather than borrow more money. Let’s face it, a debt is a debt and ultimately it will always need paid off, with interest in most cases. Rather than spreading the term over a longer period to reduce the burden, why not investigate if there are ways you can earn more money, make larger monthly repayments as a result and reduce your debt burden quicker than through consolidating. Perhaps you can hammer out overtime at your work, or have a few yard sales, get building some crafts and sell them on-line. There are always ways to increase your income if you have a little time and open up to thinking about things a different way.
So there you have it, while consolidation can be a good thing, it is important to know what you are getting in to, the terms, the cost and the period you are committing to. It is important to know there are alternatives to traditional Consolidation Loans, and that some of these do not require you to take on another form of debt.
