When debtors wonder whether debt consolidation makes sense, they are really faced with two possible options. Both options often distract from the true goal, which is (or should be) to improve the debtor's personal finances. Whether debt consolidation makes sense at all really comes down to that question: "Will this improve my financial well-being?" Keeping that objective mind, facing these two options becomes less complicated.
The first is whether debtors have the ability to draw on equity in their home to consolidate consumer debt. Now this was a topic of discussion for a recent a recent article but the idea behind using equity is twofold. Primarily, debtors should use home equity to reduce total average interest costs and, secondarily to increase cashflow.
In this case, whether debt consolidation makes sense will depend on how the debtor can curtail (or ideally eliminate) future consumer debt. Debtors who simply rack up more and more in consumer debt following a debt consolidation will simply erode their net worth on a continual basis and, truthfully, their problem is not a debt problem, it is a spending problem.
Second, if the debtor cannot secured a loan with home equity they may have to resort to an unsecured debt consolidation loan. In such cases, unsecured debt consolidation loans probably will not yield much better rates. So the question to ask will be whether or not a consolidation will improve cashflow.
With cash flow as the only possible benefit, deciding whether debt consolidation makes sense becomes extremely easy. Simply compare all currently payment outflows to the payment on the new, proposed consolidation loan. If the loan payment is lower, then the debtor will experience an improved cash flow. The question, however, really becomes whether the improvement is sufficient to the debtor afloat throughout the month. In cases where it is insufficient, debtors will need to examining other options.
Obviously, using home equity to consolidate consumer debt is the ideal solution for most debtors as it will easily improve cash flow and also provide a better interest rate on all debt. If there is no home equity, or insufficient home equity, debtors need to weigh whether debt consolidation makes sense under an unsecured consolidation loan since rates will usually be much higher and loan terms much shorter. With that mind, borrowers should investigate all alternatives for unsecured loans (see below) and try to secure as low a rate as possible.
The first is whether debtors have the ability to draw on equity in their home to consolidate consumer debt. Now this was a topic of discussion for a recent a recent article but the idea behind using equity is twofold. Primarily, debtors should use home equity to reduce total average interest costs and, secondarily to increase cashflow.
In this case, whether debt consolidation makes sense will depend on how the debtor can curtail (or ideally eliminate) future consumer debt. Debtors who simply rack up more and more in consumer debt following a debt consolidation will simply erode their net worth on a continual basis and, truthfully, their problem is not a debt problem, it is a spending problem.
Second, if the debtor cannot secured a loan with home equity they may have to resort to an unsecured debt consolidation loan. In such cases, unsecured debt consolidation loans probably will not yield much better rates. So the question to ask will be whether or not a consolidation will improve cashflow.
With cash flow as the only possible benefit, deciding whether debt consolidation makes sense becomes extremely easy. Simply compare all currently payment outflows to the payment on the new, proposed consolidation loan. If the loan payment is lower, then the debtor will experience an improved cash flow. The question, however, really becomes whether the improvement is sufficient to the debtor afloat throughout the month. In cases where it is insufficient, debtors will need to examining other options.
Obviously, using home equity to consolidate consumer debt is the ideal solution for most debtors as it will easily improve cash flow and also provide a better interest rate on all debt. If there is no home equity, or insufficient home equity, debtors need to weigh whether debt consolidation makes sense under an unsecured consolidation loan since rates will usually be much higher and loan terms much shorter. With that mind, borrowers should investigate all alternatives for unsecured loans (see below) and try to secure as low a rate as possible.
About the Author:
Chris Blanchet has more than 16 years of experience in the financial services industry. He writes about Debt Consolidation at Debt Consolidation Opinions.com. He also maintains a Debt Free Blog at How to Repay Debt.com where you can receive a free bankruptcy guide.
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