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Debt consolidation is a popular method people use to address high levels of personal debt. When using debt consolidation, you combine all your outstanding debts into a single new loan, typically at a lower interest rate. Debt consolidation can help to simplify debt management, and these loans often help to lower monthly payments as well. However, before deciding to use debt consolidation, ask the potential debt consolidation company the following three questions.
1. Is Debt Consolidation a Good Choice for Me?
While debt consolidation can be a viable option to address heavy personal debt, it's not for everyone. Before committing to debt consolidation, ask the lender if debt consolidation is a good option for you. For example, if addressing your credit card balances is just a matter of applying more of your income toward monthly payments, you may not even need a debt consolidation loan.
In other cases, debt consolidation may not even be an option for you. If you lack real property to secure a debt consolidation loan, such as a home, you may not be eligible for the kind of loan terms you need to deal with your outstanding debt adequately. Additionally, if you have poor credit, you may not be able to qualify for a debt consolidation loan at all, or otherwise may not be eligible for a loan with an interest rate and payback horizon that are helpful for your financial situation. Finally, if you've lost your job or otherwise don't have the capacity to pay back the high level of debt you're carrying, it might not be worthwhile to consider debt consolidation.
2. Are There Other Options to Address My Debts?
Ask your lender if you should consider any other options to address your heavy debt load. Even if you can qualify for a debt consolidation loan, it may make more sense to use other means to deal with your debt problem. For example, if your debt is so high that you're worried about keeping up with monthly payments, it may be better to consider debt settlement services such as those offered by National Debt Relief.
If your spending habits are more of a problem than your credit card balances, working with a credit counselor may be a better course of action than securing a new loan. Finally, if your financial situation is so dire that you may simply never be able to pay back your debt balances no matter what you do, bankruptcy may be the only option. Regardless of your situation, you should definitely ask your lender what options you should consider for dealing with your debt. If nothing else, you can use your lender's frankness (or lack thereof) to determine whether you want to pursue a loan with that institution.
3. What Types of Debt Consolidation Loans Are Available to Me?
If you've determined that you're going to pursue a debt consolidation loan, you should next ask your lender what types of debt consolidation loans to consider. One of the most common types of debt consolidation loans is a secured loan. With a secured loan, the lender will issue you the debt consolidation loan using your real property, such as a home, as collateral to secure the loan. Lenders typically issue secured loans at lower interest rates, helping to lower your monthly payments. If the loan uses your house as collateral, your annual interest may be tax deductible as well. However, if you default on the loan, the asset you used to secure it could be at risk.
A standard or unsecured loan is another popular option for debt consolidation. With an unsecured loan, you don't have to provide any real property as collateral. If you're unable to repay the loan at some point in the future, you have no property tied to the loan. However, if you have a high level of debt or less-than-stellar credit, it may be difficult to obtain an unsecured loan at an interest rate that lowers your monthly debt load. You won't be eligible for any tax deductions with an unsecured loan, either. In any case, your lender should be able to explain the debt consolidation choices that are available to you, so you can weigh your options to make the best possible decision.
Ask Your Lender, BUT Get a Second Opinion, Too!
When considering debt consolidation, asking these three questions will help you understand the options you have available to address debts. However, prior to committing to a course of action with any lender, you should seek out a second opinion. Find a trusted financial advisor, one who has no bias toward any financial decision you might make. A second opinion from a trusted advisor can help you affirm what you discussed with your lender, or give you more things to consider prior to making a final decision about your debts. In any case, having that second opinion will enable you to move forward to improve your financial situation with true peace of mind.