| Two Factors To Help Decide Whether Debt Consolidation Makes Sense Or Not |
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| Written by Chris Blanchet |
| Wednesday, 01 July 2009 14:29 |
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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.
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 option facing debtors is whether they can use the equity in their home to repay consumer debt. This was dealt with in greater in another recent article, but the bottom line is that debtors should use their home equity in order to achieve two things. The first is to obtain a better rate on their total borrowers and the second is to improve cashflow. Whether debt consolidation makes sense in this case really depends on the debtor's determination. If the debtor can avoid future consumer debt, then it has been; otherwise, racking up additional consumer debt only results in an erosion personal net worth and the underlying issue is not debt, but bad spending habits. The second option facing debtors will be the issue of an unsecured debt consolidation loan. Where consolidation loans secured by home equity will normally result in lower rates, unsecured consolidation loans may not. Therefore, debtors with only this option available to them will aim at improving cashflow and not necessarily total interest costs. 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. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. 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. |
| Last Updated on Sunday, 12 July 2009 14:24 |