How Debt Consolidation Helps (or Hurts) the Pocketbook - Tips from American Financial Solutions

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Anyone in debt has probably considered taking out a debt consolidation loan as a way to get their finances in order. While these streamlining loans may be beneficial for some, people need to understand the advantages and disadvantages of making this financial move. American Financial Solutions provides tips on how to approach a debt consolidation loan

Credit cards in wallet

Consolidate your wallet

Failure to close the credit cards, and running up new debt on the cards, is the most common problem we see when people try to get themselves out of debt by using a consolidation loan,” said Becky House, Education Manager for American Financial Solutions.

A debt consolidation loan can be a tempting option for someone who is having difficulty organizing bill payments each month. It may also be appealing for people having trouble keeping on top of bills and loan repayments due to financial reasons. However, it is important to consider all of the advantages and disadvantages of taking out a loan to consolidate unsecured debts. American Financial Solutions provides some tips and guidelines to follow when considering this type of loan.

There are two main advantages to using a debt consolidation loan. If the consolidation involves changing unsecured debts into secured debts, like a home loan, people may be able to benefit from lower interest rates. As a result, more of the money paid goes towards paying down the debt rather than interest and the debt may be paid off sooner.

The second benefit is that of convenience. Rather than making multiple payments to creditors, people make one monthly payment.

There are serious down sides to taking out a loan to repay debt as well. Unsecured consolidation loans may involve a longer repayment term. So, even if the current monthly payment is low, someone could actually end up paying more in total interest over the term of the loan. Find out the overall cost to borrow the money, before proceeding with a consolidation loan.

Also, if someone is using collateral, such as a home, to secure their debt consolidation loan, they could find themselves in a very vulnerable position. Nonpayment could cause collateral to be seized by the creditor, leaving the person in a worse situation than they were in before taking out the loan.

Finally, when a new loan is taken out and credit card accounts are paid down to a zero balance, people may be reluctant to close the accounts. They may continue to charge on the credit card accounts and end up with more debt than when they started – the original debt in the consolidation loan and the new charges on credit cards.”Failure to close the credit cards, and then running up new debt on the cards, is the most common problem we see when people try to get themselves out of debt by using a consolidation loan,” said Becky House, Education Manager for American Financial Solutions.

When looking for a loan it is important for people to work out exactly how much they need to pay back and how much they can afford to put aside for payments. They also need to establish whether they are able and prepared to secure their consolidation loan with collateral.

The next step is to shop around, examine interest rates, company profiles and their customer service backgrounds. Someone may also choose to try and negotiate for the best rate with a lender.

Debt consolidation loans can be difficult to obtain. Lenders generally do not want to lend money to pay off other debt. If someone has a history of late payments to creditors and trouble paying bills, they probably will not qualify for a debt consolidation loan. Someone with a high credit score, who also shows enough income to repay the loan, will probably qualify.

For people who do not qualify for the loan (and some who do) a debt management plan may be a good alternative because it is a consolidation of payments rather than debt. Debt management plans can be accessed with the assistance of a credit counseling agency and can help someone avoid distressing collection calls from creditors chasing payments.

A non-profit credit counseling organization can offer certified credit counselors to help people examine their financial situation and learn more about their options for debt consolidation loans, as well as debt management plans and other ways for managing unsecured debt.

American Financial Solutions (AFS) is a non-profit 501(c)3 financial education and credit counseling agency that helps people find solutions for managing their money and changing their financial lives for the better. Since 1999, AFS has helped over 750,000 individuals across the United States through one-on-one counseling, financial education classes, or the use of debt management plans. AFS is a member of the National Foundation for Credit Counseling (NFCC) as well as the Association for Independent Consumer Credit Counseling Agencies (AICCCA). AFS is also accredited by the Council on Accreditation (COA) and has an A+ rating by the Better Business Bureau. For more information, please visit http://www.myfinancialgoals.org. Find us and like us on Facebook (facebook.com/AmericanFinancialSolutions) or follow us on Twitter (twitter.com/MoneyTips4You)

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