January 23rd, 2010 | 
Author: 
If you and your new debt consolidation loan do not meet the following five hurdles, debt consolidation is not your answer to debt relief.
1) You will not add any more debt after you consolidate the debt you have now.
This is hard. This means you are going to have to take a cold, hard look at how you got into debt in the first place. Then you’ll have to take the actions that will turn your spending and income from the red into the black.
Changing your spending and earning habits means different things for different people. Maybe you’ll just eat out less.
Maybe you’re not getting any new clothes for the rest of this year. Or maybe you need to do both those things, find a second job, and move to significantly cheaper housing. Start thinking of being at peace about money as a kind of wealth in its own right. There are a lot of books, and free support groups that can help you get your head and your heart around what needs to happen with your wallet.
2) Your debt consolidation loan is not at a variable rate.
All loans have interest rates – its the cost of borrowing the money. Some loans have interest rates that don’t change over the life of the debt consolidation loan, so the interest rate you pay on month #1 is the same interest rate you pay on month #36. These are called fixed-rate (or fixed rate) interest loans.
The other kind of interest is variable. Variable interest loans can change, and sometimes they change a lot. A good example of a variable interest rate loan are credit card offers with 0% interest on balance transfers. But that’s just the bold print on the envelope. The fine print says you get to pay 0% interest for a year (for example) and then the interest rate jumps to 16.99%.
Variable interest rate loans can work off of time (you get six months of a low rate on your debt consolidation loan, then you get a very high rate) or on how you meet your obligations to the lender. For instance, your loan may have a clause that if you have one late payment, the interest on your loan will go from 6% to 16%.
3) The interest you pay on your new debt consolidation loan is less than what you’re paying on your current loans.
This can be tricky to calculate, but you can eyeball the various interest rates to get an idea where you stand. The idea is to make sure you aren’t trading an average interest rate of 11% in for a new loan at 15%. That would just have you paying more interest, instead of more principle, and would keep you in debt longer, and more expensively, than you are now.
4) Your debt consolidation loan costs you less money than the total of your other monthly debt payments.
The goal for the debt consolidation loan is to reduce the amount of money you owe each month for debt payments. If your new debt consolidation loan doesn’t do that, its not worth the hassle of getting it. Having just one loan will make managing your debt easier, but that alone is not worth getting a debt consolidation loan.
5) Your new debt consolidation loan allows you to pay off your debt faster than your old loan accounts.
The goal is to get out of debt. The faster, the better. If your new loan is going to take longer to pay off than all your old loans, then you’ve just prolonged the problem. This can be tempting, because some debt consolidation loans offer really long repayment terms, like 72 months or more.
These long-term loans will cost less per month but this has two very negative affects: 1) you will pay significantly more interest over the life of the loan and 2) the lower monthly payment will reduce the pressure on you to change your spending and earning habits. You’ll just be paying more to avoid an expensive problem longer.
Posted in Debt Consolidation | 
Tags: Consolidation Debt, Debt Relief, Hurdles, Interest Rate Loans, Rate Interest, Rate Loan, Six Months, Variable Interest Rate