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 Using a debt consolidation service can be a great way to finally put all of those outstanding debts together in one place. With this type of debt service, you can covert all of your smaller loans and outstanding credit card balances and leverage the terms you can get with one larger loan. But all of the benefits of using a debt consolidation service come at a cost. So let's make sure you are prepared to make that big step.
Understanding Debt
We've all read the debt statistics that explain to us how much debt the American public is taking on. The national debt is rising and economists debate the benefits and costs associated with our present economic growth approach. Unfortunately, there is a big difference between the debt the federal government is taking on and that of the average American household.
As long as foreign governments have faith in the US economy, that debt can continue to rise. But as far as individuals are concerned, creditors and lending institutions may not be all that confident that we will eventually be able to pay off the money we owe them - and for good reason. The government can always raise taxes to lower their debt or balance their budgets; individuals don't have that luxury.
What Causes Debt Problems
Using a reputable debt consolidation service is a good way to help lower your overall monthly costs. But first let's turn to the business world and look at one of the basic, fundamental measures of a good company. Arguably the most important statement that creditors and lenders look at is the income statement where:
Income - Expenses = Profits or (Loss)
Individuals can get in trouble when they disregard this basic rule regarding profit and loss. Household expenses outpace family income for too long and "losses" continue to mount. At first theses losses might be hard to recognize because they are hidden behind a large line of credit offer by a credit card company. But eventually they can get your attention.
Managing Debt with Budgets
Most companies strive to be profitable, and to keep them on course they use budgets. We consumers can also learn from budgets by examining where the money comes from and where it all goes. Most of us only have one or two sources of family income. It's the monthly expenses that are a little more difficult for us to completely understand.
We've done a lot of work in this topic area. And we're certainly not trying to discourage the use of a debt consolidator, but you owe it to yourself to make sure you can stay out of debt over the long haul. Our article on Budget Worksheet is a great start for those of you that have never built a budget before. Remember, the goal is to eventually be debt free - or at least feel more in control of your debt.
Debt Negotiations
Another alternative to debt consolidation is debt negotiation. Here we are talking about the process of working with your creditors to see if more realistic payment arrangements - sometimes referred to as deferred payment arrangements - can be made. For example, if your electric utility says you owe them $800, are they willing to let you pay off that amount over the next six months? If you are having short term trouble making your monthly payments, then negotiating with creditors may help.
Just be aware that when you call a company about a deferred payment arrangement, they may get even more aggressive in their collections activities. And don't count on sympathy from the collector. They are trained professionals that are used to hearing what they quickly might believe are "lame" excuses.
You are much better off taking a humble approach, explaining the facts behind your situation, offering a payment solution and negotiating from that point. And if you're not good at negotiating, you might want consider hiring a firm that specializes in supplying debt negotiation services.
Consolidating Debt
We've offered several viable alternatives up to this point, but if you're still convinced that you need the help of a debt consolidation service, then here are some final pointers. There are some big advantages of having one large loan that puts all of your debt together in one place:
- It helps keep the creditors off your back.
- You gain the benefit of lower monthly interest charges versus that rates charged on a credit card balance.
- And you can finally gain an appreciation for the total amount of debt you are carrying.
But this kind of service comes with a cost. It is very likely that the debt you are thinking about consolidating is unsecured debt. A utility cannot make you give them the energy back - it is consumed. A debt consolidation loan will very likely be a secured loan that requires collateral. Unless you own something that is really valuable, it is also very likely that your home will be used as collateral.
Because your home is used to secure the consolidation loan, debt consolidation is a serious matter. If you stop making your monthly payments or start missing payments, then possibility of foreclosure on your home or the seizing of your assets is very real. The service provided by these companies certainly helps a lot of people to deal with their financial problems, but make sure you've got the basics down first:
- Take a close look at your lifestyle and make sure you've got enough income to support the lifestyle your living.
- Put together a budget to help you understand where the money goes.
- Lay out a profitable plan - one where your income exceeds your expenses.
- Pay close attention to the numbers each month and you can work your way out of debt.
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