There are many reasons why people get into debt – some of them self inflicted and some of them way outside of our control. Losing a job, illness or accidents, all of these can suddenly plunge one into unexpected expenditure, and often the only way to deal with the emergency is to use debt. There is a tendency, however, to keep on borrowing once you start. This is because the process becomes so easy – credit card companies and banks seem keen to throw cash at you, and the interest payments, when regarded individually, often seem insignificant.
Before you know it, you are deep in debt, owing money to several institutions and card companies, and the bills are mounting. This is the stage when one starts to notice infomercials and TV ads for ‘debt consolidation’.
Put simply, debt consolidation involves replacing a number of smaller debts at varying rates and conditions with one single ‘super’ debt at a single (often lower) interest rate and set of conditions. For some people, consolidating debt may be a good thing – for other people it may be bad. It all depends on an individual’s circumstances. To explore this, lets look at the types of debt.
Some debts are ‘good’. Mortgages and student loans are good debts because firstly they have funded the purchase of a valuable asset (a home or education) and secondly because they are usually tax-deductible. Aside from loan-sharking (which you should, of course, NEVER consider!) running up debts on credit cards is the worst form of borrowing, as the interest rates are frankly usurious, and the card companies actively try to encourage you only to make the minimum payment, thus keeping you in debt for longer, and maximizing the amount of interest they suck from you.
So is debt consolidation a good deal? It depends. If you are really under pressure, and need a breather, sometimes consolidation can be the only way to get yourself some space in which to sort out your life and finances. The downside is that the consolidation payments, while appearing to be smaller than the sum of your previous debts, usually last for a longer term, meaning that you effectively pay more over the life of the loan. And this, of course, is how the consolidation companies make their money – they have to profit in some way, otherwise why would they bother?!
One VERY important point to note is that your debt consolidation company must allow you to ‘overpay’ – pay more than the standard monthly payment if you wish. You may have a sudden windfall, or a payrise, and paying down the debt makes perfect financial sense. If they WON’T let you overpay, look elsewhere – there are plenty of debt consolidation firms out there who want your business!
Having achieved a consolidation, you will still need to make some fundamental changes to your life. You have to get back on the track of spending less than you earn. Only when you have done this will you be able to increase your repayments, and get the size of the debt down. Getting spending down is not actually as hard as it sounds. For example, many people think nothing of spending $4 or $5 on a Starbucks coffee and bun first thing in the morning. Why? They are ‘treating’ themselves because it is such a struggle going to work! Try waiting till you reach the office, and drink the free coffee there.
Granted, it doesn’t come in a fancy cup, or have a caramel splash, but it’s F-R-E-E. And forgoing a single $5 coffee every day will save you $100 a month. That’s $1200 a year, ignoring interest! Think about it, and you will start to see MANY opportunities to scale back spending. Make your own sandwiches, and take them to work – far cheaper and much healthier than a McDoodah’s!
So how do you choose a debt consolidation company? Ask your friends and family. Don’t be embarrassed, many people end up in debt thru no fault of their own, and your family will probably be supportive. Never go with a company that wants your paycheck, and then sends you on a much smaller check – you are effectively handing over control to a third party here, and getting into control of your debt is an empowerment strategy, not a wimp out clause. Never agree to anything over the phone, and ALWAYS get the paperwork checked, even if just by your partner or sibling.
They may spot something you missed. Stick with the big companies – even though their deals may look slightly less attractive, they won’t try to screw you. If you can follow these simple debt consolidation tips, you can quickly get your debt problem under control and get back on the path to a debt free life!