Despite how you might be feeling right now, know that it is possible to get out of debt, and a good debt consolidation program can really help. Know, however, that getting out of debt is only half your goal. Once you’re out of debt, you need to put into place a plan to STAY out of debt.
A brief look at the history of U.S. interest rates shows we’re currently in a historical period of low interest rates, but that could change — and soon.
A major cause of interest rate rise is inflation. The reason is simple: debt providers see your debt as an investment and significant inflation, even just the fear of it, will motivate lenders to raise your rates. With current federal spending at 25% of G.D.P. and deficits as far as the eye can see, Vernon Smith, a Nobel Prize winning experimental economist at George Mason University suggests that the only way the U.S. will be able to manage its debt will be to inflate its way out of it.
This means in the near future, you could face a double whammy of both higher interest rates and inflation.
The take home message for anyone watching the headlines is: it’s time to start getting out of debt. And one of the most cost effective ways of getting out of debt is with a debt consolidation loan – under the right conditions, of course.
Debt Consolidation Help
But is debt consolidation an effective debt management tool? Consider Greece, which is already on the brink of default, and some European countries, such as Portugal & Ireland, that appear to be moving towards default. Despite all the uncertainty about what to do with these countries, the experts are agreed on at least one thing: Countries in danger of default need to put into place debt-consolidation plans as soon as possible to avoid higher borrowing costs – and indeed this is exactly what’s been happening. But whether debt consolidation will save Greece is still an open question.
It’s important to distinguish between debt consolidation and debt settlement. With debt consolidation, you take all your existing debt from multiple sources and “consolidate” them into one source so that you have a single payment where the interest payment on that single payment is less than the sum of the interest payments on all the separate debts. Debt settlement, on the other hand, is where you try to reduce the absolute amount of debt that you owe.
Advantages of Debt Consolidation
The main advantage of debt consolidation is that the lower interest rate means a lower monthly payment. An additional benefit, if you plow the savings back into extra payments, is that your debt will decrease at a faster rate and this will have a positive effect on your credit score.
Should You Go with a Debt Consolidation Company or Consolidate on Your Own?
A debt consolidation company can manage the consolidation on your behalf by contacting and negotiating with your creditors. You will then make payments to the consolidation company and they’ll forward the payments, minus their fee, to your creditors, but – beware! Scams abound.
Before using any debt consolidation company, contact the National Foundation for Credit Counseling to see if they’re approved. Also contact the Association of Independent Consumer Credit Counseling Agencies to get their advice. Finally contact the Better Business Bureau and find out if anyone has filed a complaint against the company.
Know that you can also consolidate on your own either through combining your debts into a single low interest credit card, a personal bank loan or one of the newer lower interest rate loan vehicles: a peer-to-peer personal loan.
But what sort of rate should you be looking for? Loanconsolidation.ed.gov has a handy little formula that will help you figure out what sort of rate you should expect. It gives an approximation based on your total loan principal and their respective interest rates.
How to Blow It After Consolidation
Debt consolidation is a great way to put yourself on the road to financial health, but it is extremely easy to blow it. David Ramsey says one of the best ways to blow it after consolidating your debt is to not change your spending habits that led you to consolidate in the first place:
Most of the time, debt consolidation is used merely to give a person enough breathing room to continue their life as usual. It’s just another way to move around bills in the short term to extend the party a bit. (TheSimpleDollar.com, Debt consolidation: how to use it wisely).
Financial experts agree that before trying to consolidate your debt, see if you can go 2 or 3 paychecks spending LESS than what you take home. If you can do that, then you’ll know that you are in control of your spending and debt consolidation is the next logical step. Without getting your spending under control, debt consolidation will not only do little good, in the long run, you’ll be in even more debt.
If your spending is truly under control, the very best thing you can do after you consolidate, is to plow the extra savings back into paying down your debt. Oh, and once you’re out of debt, put a plan in place to STAY out of debt.