There are many reasons one may find themselves in overwhelming debt - a unrealistic car payment, a school loan, credit cards, the list is endless. It is tempting to look to bill consolidation or debt consolidation as an easy answer to the multiple monthly payments that must be made each and every month.
If you are behind on payments the situation is even more serious and can lead to some bad decisions if the facts of a bill consolidation are not carefully thought through. The advantages of a bill consolidation plan, the consequences of bill consolidation, and debt reduction are discussed in further detail below.
Advantages of Bill Consolidation
There are advantages to bill consolidation which has made this a popular choice of those wishing to simplify the debt repayment process and lower interest rates on outstanding debt. A common way to consolidate debt is through a bank or other lending institution by using a home equity loan.
Taking out a second mortgage will provide a homeowner with enough money to pay off existing debts to credit cards and other unsecured debts and roll the debt load into the mortgage on the home. The advantage is that there are tax breaks on a home loan payment as well as the interest rates are often much lower than on credit cards or other unsecured debts.
Another common bill consolidation strategy is to use a company to manage the bill consolidation plan for you and negotiate with your creditors on lower interest rates or payments and then consolidating the outstanding balance to one payment. The bill consolidation company will then take the one payment you pay to them each month (which includes each of your bills and their fee) and then they will pay each of your creditors the rate that was previously agreed upon. This allows you to only focus on making one payment instead of multiple payments and in many cases the bill consolidation arrangement actually lowers the interest rate or total amount of debt.
Disadvantages of Bill Consolidation
While there may appear to be very little downside to bill consolidation consider the difference between a secured and an unsecured loan. A secured loan means that there is something that can be taken away if the payment is not made. A common secured loan is a home loan where the equity in the home can be used to borrow against for the purposes of bill consolidation. In contrast an unsecured loan like a credit card does not have collateral but will mark your credit history if payments are not made.
For someone that is in financial trouble moving from an unsecured loan to a secured loan means that you are putting your home at risk if you are unable to make your consolidated payment. Secondly most home mortgages are long term loans meaning that instead of having credit card debt that may take a few years to get rid of now the loan is rolled into the mortgage - typically 30 years. While the interest is lower you will most likely end up paying more in the long run since the loan and interest payments are extended for so many years.
Using a bill consolidation service to manage the debt repayment program will show up on your credit report. In addition there are some companies that may overcharge for this service negating the savings or potential advantage of using it in the first place. While it can be a solution for some in very serious financial trouble a better alternative is to organize the debts and set up an automatic payment plan to get rid of the debt one credit card at a time.
Debt Reduction Without Bill Consolidation
The main problem with debt consolidation plans is that for the most part it is delaying the repayment of debt or shifting it to another source but not eliminating it. By setting up a bill consolidation it may actually encourage spending of additional money with the newly found room in the budget. The best way to get rid of the debt is to set up every payment to automatically draft from a checking account.
Consider transferring the balance of high interest credit cards onto one or two cards and then work to pay down the smallest debt first and then once each debt falls off roll that payment onto the next smallest debt thereby accelerating the payoff of each outstanding debt without a bill consolidation.