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 a debtor can and should use the equity in their home to pay out their consumer debt. Although this was the topic of a recent article, borrowers should always use their equity if it means improving their financial wherewithall. The reason? Cutting total interest costs paid to lenders and improving monthly cashflow for the household.
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.
When cash flow becomes the only factor, determining whether debt consolidation makes sense is a very simple task. All debtors need to do is add up their current bill payments and compare it to the payment on the new consolidation loan. If the new loan payment is lower, than cash flow has improved. In cases where cash flow has improved, debtors should then determine whether it is sufficient to keep them afloat. If not, other options need to be explored.
Without question, consolidating consumer debt with home equity provides the ideal solution to debtors. In instances where there is no home equity or the equity is not enough, debtors need to work harder to determine whether debt consolidation makes sense with an unsecured loan. On such loans, rates will be higher and repayment terms shorter, meaning higher payments than, say, a refinanced or second mortgage. Since rate is the only controllable factor, debtors need to find the lowest-rate loan possible (see below) so that payments are lower.
The first is whether a debtor can and should use the equity in their home to pay out their consumer debt. Although this was the topic of a recent article, borrowers should always use their equity if it means improving their financial wherewithall. The reason? Cutting total interest costs paid to lenders and improving monthly cashflow for the household.
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.
When cash flow becomes the only factor, determining whether debt consolidation makes sense is a very simple task. All debtors need to do is add up their current bill payments and compare it to the payment on the new consolidation loan. If the new loan payment is lower, than cash flow has improved. In cases where cash flow has improved, debtors should then determine whether it is sufficient to keep them afloat. If not, other options need to be explored.
Without question, consolidating consumer debt with home equity provides the ideal solution to debtors. In instances where there is no home equity or the equity is not enough, debtors need to work harder to determine whether debt consolidation makes sense with an unsecured loan. On such loans, rates will be higher and repayment terms shorter, meaning higher payments than, say, a refinanced or second mortgage. Since rate is the only controllable factor, debtors need to find the lowest-rate loan possible (see below) so that payments are lower.
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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