Understanding Debt Consolidation

If you have a number of different loans, each with its own ugly interest rate, you might want to look into debt consolidation. This is when you combine a series of loans into one big loan with one monthly payment. But debt consolidation isn't necessarily for everyone, and like any financial move, you need to do it with caution. Here are some tips if you're looking to consolidate your debt.

Is debt consolidation right for you?

First, determine if going to an outside debt consolidator is the right move for you. You may be better served simply devising a strategy on your own for paying off your loans - perhaps starting with the smallest loan first, so that you'll have a sense of accomplishment when it's finally paid off, or the one with the highest interest rate. Use a debt consolidation calculator which can help you determine whether or not consolidation makes sense in your case.

You can also try talking to credit card companies yourself to see if you can get a lower rate by taking your business elsewhere. Another strategy is to create a form of debt consolidation by taking out one large loan to apply to the smaller loans, by refinancing your house or your car, transferring balances to a lower-interest-rate card, or taking a personal loan.

Getting Help

If debt consolidation is the right strategy for you, you then have to decide who will help you. Beware of for-profit debt consolidators who make fairy-godmother-style promises of sweeping all your debt away. First, you'll be paying a fee for their help; second, they may miss or be late on payments, putting you in even more trouble. The promise of low payments may not be worth it, as your loans get stretched out over decades and interest keeps piling up.

A better strategy is to get in touch with the National Foundation for Credit Counseling. The NFCC is the umbrella organization for a Consumer Credit Counseling Services (CCCS) across the country. You can call and get referred to a counselor in your area for a consultation. Since CCCS are nonprofits, you don't have to worry about being manipulated into paying a fee for having your debt consolidated. The NFCC currently has a worksheet on its website, "Questions to Ask When Considering Debt Settlement."

Not a cure-all

Finally, know that while debt consolidation may be a step in the right direction, it won't make your debt go away. You can think of debt consolidation as a stepladder you can use to help yourself climb out of bad debts; you'll still have to do the work yourself to pay off the bills and ascend the ladder.