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Should I Consider Debt Consolidation?

Debt...how can such a small word have such sweeping, life-changing consequences? If you owe more than you can pay, you've probably considered the prospect of debt consolidation. It sounds like a great idea, doesn't it? Clearing all your credit cards, eliminating multiple monthly bills, and restructuring all your remaining balances into a single monthly payment with one interest rate -- what's not to like?

You may already be raising your eyebrow and asking, "What's the catch?" Unfortunately, there's always something. You need to think carefully and make an informed decision. This option isn't necessarily what's best for you. It's important to evaluate your options carefully on a specific, case-by-case basis, rather than just making impulsive decisions. Let's look at what you need to consider before deciding whether this solution suits your individual needs.

What is Debt Consolidation?
Debt consolidation is a form of refinancing. You take out one large loan and use the money to pay off several other loans. For example, you might pay off a bunch of credit cards, which is a sensible idea if you can replace that high-interest credit card debt with a low-interest alternative. Don't get all starry-eyed though. A loan may only mask the underlying issue, and it could make your situation worse. Rather than being the Godsend mentioned above, it could turn into a real nightmare, with high fees and long-term interest payments that could potentially put you even further into the red.

The Good, the Bad, and the Ugly
Bluntly put, debt consolidation loans are seldom a good idea. It might be hard to come to terms with this since paying off all your credit cards and converting multiple payments into a single, lower interest rate loan sounds tempting. Remember that a consolidation loan is just another financial product. Like any product, it's designed to make a profit for the seller. As such, it won't necessarily be the financial cure-all it might seem at first. The money needed to generate a profit has to come from somewhere, and specifically, that place would be your wallet.

Remember to evaluate financial options on an individual, case-by-case basis: Your unique situation may benefit from such a loan. First things first, do your math. Use your remaining credit card balances, their corresponding interest rates, and your current monthly payments to calculate how long it would realistically take you to pay everything off. Let's take a look at some scenarios that you can later match up to your findings.

When to Avoid a Loan
First, let's look at the term. The average consolidation loan is around 60 months (5 years). You may be able to find an institution willing to extend the term to 72 months (6 years). Either way, if you do your credit card math and realize you could pay off what you owe quicker with your current monthly payments, a loan is probably a bad idea. Even if the interest rate on the consolidation loan is lower than that of your credit cards, the longer term could have you paying more on interest in the long run. It might be less expensive to take the faster option, even if it's also less convenient.

Next, take a look at the monthly payments. If the amount you'll need to pay each month on a consolidation loan is greater than what you're currently paying each month on your combined credit cards, then consolidation is probably a terrible idea! If it realistically fits your budget to pay more each month, just put the extra cash towards your credit card bills. Even if the monthly payment on the consolidation loan is less than what you pay towards your cards, the above-mentioned longer term could still result in you paying more at the end of the day. Do your math carefully.

Here's an important question: are you just using consolidation as a Band-Aid? If your financial behavior is the root of the problem, paying off all your credit card debt with a consolidation loan is just adding another creditor into the mix. If your habits are going to put you in the red with this new loan, using the method is completely pointless. And that's not even the worst part. If you're going to use this new loan to pay off your cards, only to charge them up again, you'll just be doubling your burden. That's a scary place to be. If your spending habits might be at the root of the problem, no amount of extra loans or greater convenience will save you unless you change those habits. If you're struggling with bad financial habits, credit counseling is most likely a more productive option than consolidation. You need to address the issues that caused this problem in the first place, not shuffle money around.

When to Consider a Loan
Okay, so you've tried everything, but you are still overwhelmed! You attempted to negotiate a lower interest rate with your credit card company, but they refused. The high-interest rates are putting you in deep trouble, your combined monthly payments are more than you can afford, and you have too many bills to handle. Now what? A loan might be a viable option as long as you're sure it won't hurt you in the end. If you've done your math carefully (triple-checked it), and it looks like the only fix, applying for consolidation might be the best course of action.

Do not go it alone, though. Seek additional help through credit counseling or a debt repayment plan. Once you've committed to this step, take it seriously. Don't double your problems by committing yourself to disreputable counselors or an unsustainable program. If you aren't careful and informed, you might find yourself with even bigger problems. It's always a good idea to get a second opinion on your math! That's not to say consolidation loans are always a bad option, but you need to see through the hype to be sure you're making the right decision for your situation.

Old Habits Die Hard
Again, a debt consolidation loan is just another financial product. You're probably just paying a financial institution to do something you can already do by yourself. Whether or not a loan suits your situation, the hard truth is that your financial habits are probably the real problem. Paying off all those cards might feel great, but you're just shuffling a deck of cards. You still owe the money. Your debt hasn't disappeared, you've just restructured it and leased it to a new creditor. If your habits are going to lead you down the road of charging up those cards again, you're out of the frying pan and into the fire.

It's highly advisable to work towards breaking those bad habits. Get some extra help through credit counseling!

Final Word
It's a big decision to make, but it's still your decision, and you have the power to make it. Don't let your ego get in the way. On a similar note, don't let the opinions of others, social pressure, or advertising hype cloud your judgment. If you know that you need help, get it.

Before obtaining a loan, remember that you have access to all kinds of help and resources. Credit counseling and debt repayment programs will help you create a budget, plan a strategy, and even negotiate with your creditors for lower interest rates! So there's always hope. Never be afraid to ask for help. After all, it takes a strong person to admit they're in trouble. If you don't ask for help, you might just miss the life-saving opportunity that's coming your way.

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