With the economic hardships of the last few years, on top of the not so distant government shutdown, many people have gone from manageable debt to borderline unmanageable debt. For some, their debt has spiraled out of control.
Generally speaking, manageable debt is where a person has the ability to pay down the debt while remaining financially solvent. Unfortunately, many people with debt problems rely on credit cards and short-term financing, ignoring the underlying issues. In some cases, they are simply unable to manage their bills without such means, but either way, it results in interest payments that quickly spin out of control.
For most, this is a financial trap that ends badly, leading to unmanageable debt. Even when people seek a remedy for their financial problems, not addressing the underlying causes simply results in more debt at a later date. This is usually because once debts are consolidated into a single loan, credit cards and other newly available finance options are leveraged once more. This repeats the process that led to seeking help with debt management in the first place.
This is one of several reasons why professional debt consolidation services are sought out by many. These services not only provide resources and assistance to get out of debt but more importantly address the underlying causes of the original debt. Not all services are created equal, though, and different companies may provide vastly different service terms.
Online resources for reviewing the top debt consolidation loans provide comprehensive lists of what different companies offer, what they donít provide, and how best to proceed, but there is much more to debt management than reviewing companies and offerings. Each company will have specific areas they excel in, and methods they use to help manage debt, but overall there are best practices every company should follow. When considering or reviewing companies, it is best to thoroughly investigate each, and avoid any that promise instant results. A great place to start is by asking yourself the following three questions:
Is the company recommending debt consolidation as a cure-all?
If so, then the company is best avoided. Debt consolidation is more than just consolidating debt. It is also about examining the reasons for the debt and providing counseling and assistance in understanding how to avoid circumstances that resulted in the original debt burden.
Is the company charging an unreasonable fee?
Most debt consolidation loans donít do much that the average person couldnít do on their own, but they do have connections and experience that allow consumers to consolidate debt more effectively, and sometimes at better rates. That said, the total fees charged by these companies should always be in either the form of loan interest or an upfront fee. More importantly, the combined fees and interest of a debt consolidation loan should never exceed the total interest of the debts youíre working to consolidate.
For example, $10,000 of credit card debt at 18% interest, paid off at only the minimum monthly payments, will take 28 years and six months to pay off. In that time youíll pay a total of $14,423.30 in interest, bringing your grand total of principal and interest to $24,423.30. Any combination of fees, payments, or loan interest should never exceed this figure. In fact, most of the time it should be considerably less. Consolidating that same $10,000 debt at 10% with $250 a month paid against it will result in the total debt being paid off in just over four years, with only about $2,200 interest paid. Thatís a saving of more than $12,000 ñ and exactly the sort of thing you should expect from a good debt consolidation company. (figures calculated from Bankrate.com)
Are you obligating assets to consolidate debt?
This is perhaps the most important consideration, as in some cases, you may be able to leverage your home for debt consolidation, but this should not be taken lightly. Interest rates are still relatively low, but guaranteeing unsecured debt with the deed to your home is a risky proposition. A good debt consolidation company will only use this as a last resort, making sure that you retain at least 20% equity in your home after taking out a line of credit or second mortgage. Even then youíll still want to be completely transparent with your bank or lending institution to ensure you donít incur any unexpected fees or penalties.
These are three of the most important considerations when looking into any form of debt consolidation, but there are others. Despite there being some unscrupulous companies in the market, the majority are dependable and transparent. Many can offer access to negotiating and bargaining options the average consumer will not be aware of. Also, unlike the average doctor or lawyer, good debt consultants should provide a free consultation. This lets you take any questions or concerns about their recommendations to your bank or a qualified financial advisor to get a good second opinion.
Building and maintaining credit isnít easy, but neither is managing excessive debt. By carefully considering options and making informed decisions, you can maintain good credit and keep your finances in order.