Anyone who has been faced with overwhelming debt knows that finding a solution can be disheartening and difficult. One possible solution to debt problems is debt consolidation.
"Debt consolidation essentially means combining and downsizing debts so that they are easier to repay," says Kevin Gallegos, a national debt expert with the Freedom Financial Network. "It just means getting all your debts under one roof, and at the same interest rate."
In many cases, consumers borrow money in order to pay off as many of their loans as they can. For those who have multiple debts at varying interest rates, it can be helpful to combine all of your debts into one so that you can better manage your payment schedule - and maybe even pay less over time depending on the interest rate of the consolidated loan.
However, even though debt consolidation can be a good option for some consumers, it doesn't work for everyone. In fact, Gallegos points out that there are some pitfalls to avoid when engaging in debt consolidation.
Protect Your Assets
If you have a large amount of debt, you may not be able to consolidate all of your debts without using a secured loan. Many consumers choose to consolidate their debts by using a home equity loan. This may be problematic, since you are taking unsecured debt and securing it with your most valuable asset.
"If you do this, make sure that there is no possibility of missing a payment, because you don't want to face a foreclosure," says Gallegos.
A car title loan against your paid-off car might also be tempting, but, if you miss payments, you could lose the car. If you rely on your vehicle for transportation to and from work, losing it could be a huge blow to your finances.
If you intend to get a secured debt consolidation loan, you must be absolutely committed to making full on time payments or you may risk losing the property or goods you pledged as collateral.
Change Your Habits
One of the most important ways to avoid the pitfalls of debt consolidation, though, is to change your financial habits.
"Many consumers view debt consolidation - or the idea of it - as panacea," says Gallegos. "It is not, and it does not replace the need for a lifestyle change to ensure that you are living within your means."
The key thing to remember is that, if you don't change your financial habits, debt consolidation programs may not help you in the long run. Thus, if you consolidate your debt, it is important to also resolve to improve your financial habits.
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