Debt Consolidation

What is Debt?

Debt, in short, is the money you owe. This can be money owed to one person or several people. It can be money owed to a company or corporation. It is money you are obligated to pay out.

What is Good Debt?

Good debt is generally understood as loans that are created to afford an investment of some sort. For example, you buy a house and purchase the house with a modest loan. This is considered a good debt because the house has a tendency to increase in value over time at a greater pace than the interest may on the loan. Also with good debt, you generally have tax benefits.

What is Bad Debt?

To the average Joe or Jane, bad debt is generally considered frivolous spending on nonessential stuff. I like this definition, though this stuff can serve an important part of the quality of our life, moderation is a key point to remember here. From an accounting point of view however, bad debt is debt that generally is made on high interest rate financing and offers little of no ax advantages.

Are You Feeling Trapped by Your Debt?

You’re not alone. I think looking at debt from a banks point can help us understand how the get us in a financial head lock. This might hurt a bit, but I think it’ll shed some light on the beast.

Debt Spiral

Loaning money to consumers is how the banks make most of their money. The banks charge interest that has to be paid back along with the initially borrowed principal. Just giving the banks back there principal is not going to keep them in business. So banks are constantly making borrowing money look very smart and trendy. Some times, it just seems too hard to pass up the offer. With all that extra cash at your disposal, what are you going to go do? Right, shop! Once we start to get aught up with buying on payments instead of paying off that Credit Card in full, you pretty much starting your plunge into your debt spiral.

What are the Signs of an Approaching Debt Crash?

You are probably in trouble with debt if:

• You use credit cards to purchase basic small household items like food;
• You don’t pay off your credit cards every month and just let the balance roll over;
• You are struggling to pay on your good debt, because your monthly credit cards for bad debt is creeping up on you;
• You take more debt to pay off your existing debt.

How Do I Start to Get Out of Debt?

Not everyone needs to get out of debt. But we do need to keep an eye on which debt is worth getting out of. The goal is to keep the good debt. Release to bad debt. And make sure we are comfortable with the monthly payments. This is a good place to talk about Debt Consolidation.

What is Debt Consolidation?

When you consolidate your existing debt, you take out a new loan to pay off several other older loans. This allows you to consolidate the money you owe into one payment instead of several separate payments.

Pros of Debt Consolidation

A debt consolidation loan could help reduce your monthly payments if you ran up several of your credit cards. Generally credit card rates tend to be much higher than a fixed rate debt consolidation loan. This will allow you to roll your high interest debt into one manageable payment. Ideally you would want to trade the higher interest debt for a lower interest rate on your newly consolidated debt load.

If you have an easier time making your payments, you can avoid late fees, extra charges, and the bad credit that will inevitably result when you can't afford to pay regular bills.

Cons of Debt Consolidation

For some people, debt consolidation may not be the answer. To start with, it can be difficult finding fair interest rates. If the rate on your new loan weren’t any better than the rate you pay on your current loans, consolidating your debt wouldn't make much sense.

It can also take longer to pay debts off. When you consolidate debt, you still end up owing the same amount of money. The main difference is usually the length of the term. This could leave you paying more in interest if the term is really long.

Key Points for a Good Debt Consolidation?

You want to get as many of these factors in your favor:

1. A lower APR
2. A fixed APR
3. Receive one bill
4. Make one payment
5. Reasonable transaction fees

Should You Consolidate Debt?

The answer to this question is different for everyone. It simply depends on your current financial situation. If you are trying to decide whether or not debt consolidation can help you save money, you should contact a financial professional who can help you crunch the numbers.