If you feel like you're drowning in debt, you're not alone. Many Americans struggle with debt and studies show 35 percent of Americans have at least one debt in collections. Keeping up with debt payments can eat away at your paycheck, forcing you to follow an extremely tight budget or, even worse, go deeper into debt, making you continue to live above your means.
If consolidating debt has crossed your mind, you're in the right place. Debt consolidation companies can help you lower your interest rates (and therefore lower your monthly payment) and roll all of your payments into one. There are, however, many things to consider before signing the dotted line. Debt is usually a symptom of a bigger problem: overspending. Many people who consolidate their debt wind up in even more debt down the line because they never tackled the actual problem. This can lead to more stress and ultimately bankruptcy.
Before consolidating your debt, you'll want to ask yourself these five questions.
Are You Still Spending Money You Do Not Have?
In other words, are you still using credit cards for your day-to-day purchases? If so, you'll most likely end in the same situation.. Only consolidate your debt if you are serious about making a change in your finances. Get rid of the credit cards, live below your means and work diligently at paying off your debt, not adding to it.
What Type of Debt are You Trying to Consolidate?
Debt that is backed by collateral, such as your house or your car, cannot be consolidated. Debt that can be consolidated includes all types of debt that are not backed by collateral, or that are unsecured. Examples of unsecured debt include credit cards, student loans and medical bills.
Can You Really Not Afford Your Current Debt Payments?
This question is a big one. While consolidating your debt can seem great on the outside, debt consolidation companies are in business because they are making money off of those who consolidate. While the interest rates do typically decrease, the length of your loans will increase. This increase in the loan term is what makes the company money. If you are not careful, you could wind up spending thousands of dollars more per loan if you consolidate versus sticking to your regular payment schedule.
What is the Reasoning Behind Consolidating Your Debt?
Be honest with yourself. Are you looking to free up some money each month so you can live a more lavish life, or are you honestly struggling to get by? If you're just hoping to have more spending money, consolidating your debt is only going to keep you in debt longer. Focus on getting out of debt now so you can live a more comfortable life later.
Have You Explored Other Options?
Debt consolidation should be a last resort. Other options for managing debt include using Dave Ramsey's Debt Snowball Plan, cutting back on expenses or finding a way to earn more money to put toward your debt. You could cut out cable, decide to only cook at home or eliminate entertainment expenses. Ways to earn more money include picking up a part-time job, freelancing from home, selling unused items on Craigslist or starting a small business.
Ultimately, consolidating your debt isn't bad, but it should be approached with caution. Make sure you are willing to change your financial habits for the better and know exactly what the terms of the consolidation are before moving forward.