Consider Whether Debt Consolidation Makes Sense Before You Sign on the Dotted Line
Whether debt consolidation makes sense or not can really only be determined by the debtor. When it comes to a consolidation, debtors have two options, which will be discussed here, but as to whether debt consolidation makes sense, period, will come down whether it improves the debtor’s finances. With that objective in sight, the following considerations need to be reviewed.
The first option facing debtors is whether they can use the equity in their home to repay consumer debt. This was dealt with in greater in another recent article, but the bottom line is that debtors should use their home equity in order to achieve two things. The first is to obtain a better rate on their total borrowers and the second is to improve cashflow.
Whether debt consolidation makes sense in this case really depends on the debtor’s determination. If the debtor can avoid future consumer debt, then it has been; otherwise, racking up additional consumer debt only results in an erosion personal net worth and the underlying issue is not debt, but bad spending habits.
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Second, if the debtor cannot secured a loan with home equity they may have to resort to an unsecured debt consolidation loan. In such cases, unsecured debt consolidation loans probably will not yield much better rates. So the question to ask will be whether or not a consolidation will improve cashflow.
When cash flow becomes the only factor, determining whether debt consolidation makes sense is a very simple task. All debtors need to do is add up their current bill payments and compare it to the payment on the new consolidation loan. If the new loan payment is lower, than cash flow has improved. In cases where cash flow has improved, debtors should then determine whether it is sufficient to keep them afloat. If not, other options need to be explored.
Obviously, using home equity to consolidate consumer debt is the ideal solution for most debtors as it will easily improve cash flow and also provide a better interest rate on all debt. If there is no home equity, or insufficient home equity, debtors need to weigh whether debt consolidation makes sense under an unsecured consolidation loan since rates will usually be much higher and loan terms much shorter. With that mind, borrowers should investigate all alternatives for unsecured loans (see below) and try to secure as low a rate as possible.
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