Is Debt Consolidation The Right Decision?
Alexander was a young working professional. His wife, Rochelle, was pregnant with their second child, and finances were tight. Alexander’s salary of $55,000 was enough to pay the bills, but they were left with nothing at the end of the month. Rochelle had experienced some complications early in the pregnancy, Alexander and Rochelle thought it would be best if she quit her full-time job and looked into getting of the small business loans to set up a small business she could operate from home. A difficult job market made it really hard for Rochelle to find anything.
Then, one day Alexander’s car broke down on the way to the office. The $1,000 repair bill drained their savings and caused them to miss a credit card payment by a few days. That one missed credit card payment sent off a domino effect, and pretty soon Alexander and Rochelle’s minimum monthly credit card payments had more than doubled and their interest rates had increased substantially.
This type of thing happens to thousands of Americans every year, and one very real solution to this type of problem is to debt consolidation.
What Is It?
A debt consolidation program can work in several ways, but the most common is for a debt consolidation company to loan you the money to pay off all of your unsecured debt such as credit cards, student loans, lines of credit, etc, and then you are able to pay back the debt consolidation company one payment each month at a considerably lower interest rate than you were paying other lenders.
There are also non-profit debt consolidation programs that simply negotiate very favorable repayment terms with your current lenders. Then, in exchange you pay a monthly fee to the non-profit organization. Typically, these non-profits have very strong reputations and their credibility as an organization is what gives them power to re-negotiate lower repayment terms for you.
Pros and Cons
Debt consolidation can be a lifesaver. When those monthly payments and interest rates spike up as they did with Alexander and Rochelle, it makes it almost impossible to make payments. A debt consolidation program can help alleviate that hopelessness. On the other hand, a debt consolidation program does not come without costs. Your credit score will most likely take a hit in the near-term, but it will typically recover and be even stronger in the long term as you work toward paying off all your debts. Also, most programs will not all you to open new lines of credit once you are in the program.