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When is Debt Consolidation Not The Right Option?
   

You may have started your decline into debt slowly but you suddenly realize that unless you pull the emergency brake, you may actually be on the road bankruptcy. As it is, you are precariously teetering on the edge of having to use one credit account to pay another one. Maybe you did not notice how it happened at first, but the reality is still the same, you need to change something in your debt profile.

Consolidating debt is usually a first thought that cross many debtors’ minds. After all, a consolidated debt may have substantially lower interest rates and therefore a much lower payment than all your various creditors are asking you to pay on a monthly basis. While at face value this might look like a good solution, there are some times when debt consolidation is not the right thing to do.

For example, if you got into debt in the first place because you either lacked self-discipline or simply are living above your means on a day-to-day basis, the odds are pretty good that you will once again find yourself in that same predicament when your creditors are paid off. If you do not bring in enough money to support your lifestyle, but if you rely on credit cards to make monthly payments to utilities, to purchase food and other necessities, you are only holding back potential financial disaster on a very temporary basis. As a matter of fact, the odds are good that you will have run up your credit cards once again before you are even halfway done paying for your consolidation loan. Ask yourself if you are willing – and able – to cut up your credit cards and still afford the necessities. If the answer is no, then a consolidation loan will not help you in the long run.

Another disadvantage of a consolidation loan is the fact that you may actually be paying more money in the long run. Sure, the payments are much lower than all your bills combined were beforehand, and theoretically you could pay down the loan faster if you had to, yet this does not always happen. As a matter of fact, you might need the extra funds just to stay afloat. So if you do the math and find that you could have paid off the original credit card in about three years, but your consolidation loan runs for a period of five years, you may actually be increasing the amount of money paid altogether, since there is undoubtedly interest being added to the principal.

If you are thinking of securing a consolidation loan with an asset, such as taking out a home equity loan on your house, you will need to remember that failure to pay off the loan will not only make it hard to sell the property, but may actually cause your house to be sold from under you. A forced sale, or foreclosure, is an option the lender has to receive the funds they lent if you are unable or unwilling to pay. Before using your primary residence as security to pay off unsecured debt, make sure you are able to pay it back in the long term. If you are uncertain of your ability to pay, or if your professional outlook is a bit shaky at the moment because of a merger or buy-out, you might want to think twice before putting your home on the line.

It is no great mystery that outstanding debts will rob you of your sleep and will cause strive and unhappiness in your home life. Rather than embarking on adding even more debt, even if it is in the form of a consolidation loan, it might be wise if you spoke to financial planner, or if you simply logged onto one of the many Internet sites that offer free budgeting software. Once you know where you are at in financial terms, you will be much more comfortable at making an educated decision about which steps to take to regain your financial freedom. If, on the other hand, you are simply taking the first step you can think of, you might not only put yourself into even more jeopardy, but quite possibly pay out more money than you really had to in the first place!

Click here if you are drowning in credit card debt, facing foreclosure, being harassed my debt collectors or simply feel like a victim of this economic crisis. It's my SolveYourProblem recommendation.

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by SolveYourProblem.com : 2007

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