Evaluating One's Readiness for Debt Relief

Debt consolidation helps hundreds of thousands of debt-addled consumers. But before contemplating this method of debt relief, consumers must weigh their other options and their readiness to begin the process. The better debtors understand their financial situation and the entire debt reduction landscape, the more likely a debt consolidation program will be to succeed.

Timing

Many debtors wait too long to consolidate debt. Once payments fall behind, their FICO or credit score suffers and some of the most beneficial options are no longer available. Debt consolidation can help most people avoid bankruptcy, even when their credit has been impaired. Any delay in seeking debt consolidation increases the level of problem debt because of interest.

Form of Debt Consolidation

A debt consolidation loan using home equity is a popular practice. If one has sufficient home equity, the problem debts are consolidated using a home equity loan, commonly referred to as a second mortgage. With a lower, fixed interest rate, tax-deductible interest and a lower monthly payment, the total cost to repay the debts is reduced significantly.

The greatest risk of the home equity loan choice is falling back into debt. Seventy percent of those who use a home-equity loan for debt consolidation are deeper in debt after two years. Using a secured loan such as a home equity loan places the asset at risk.

Another form of consolidation loan is the personal loan. Because this loan is unsecured, it has an interest rate higher than a secured loan, but, in most cases, still lower than the interest rates on the previous debts. The amortization of a personal loan results in more of each monthly payment going to principal than credit card payments do, so the consolidated debt is repaid faster.

The risk of a personal debt consolidation loan is that the person may accumulate more credit card debt, once the loan proceeds are used to pay off the credit card accounts. The person may return to debt within two years if their bad financial habits continue.

Debt consolidation loans are an appropriate solution to high interest debts. Careful consideration, timely action and financial discipline are required to ensure that taking on debt to pay off debt results in debt elimination.

About the Author
Settle your debts today! Read about debt relief from financial writer Brad McDonnell, who is an expert on personal finance topics involving debt consolidation and credit card debt. Credit Solutions provides an affordable consolidation alternative.

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