A 10,000 Foot View of Debt Consolidation

Written By Ellise Walsh

Tue 4/12/2005 10:30 AM

By any national study or statistics done in this field, personal debt is at an all time high.

But national figures and statistical studies don�t do a thing for you and me if we have the challenge of managing and trying to get control over a private debt situation that seems like it is going to consume us. So we turn to the many alternatives to learn what are the pros and what are the cons of different debt consolation plans.

It may seem like there are a myriad of varieties of debt reduction available but in essence the viable ones boil down to the top four debt management options. So let�s get started.

Credit Cards

It is a common �trick� many people play of moving their debt from one credit card company to the next so it stays in constant movement but never gets paid off. That is a dangerous game if played in a way that never puts real resolution funds into play because transfer feeds and interest will continue to mount that debt up until it is impossible to manage in this way.

However, credit card companies are at this time the hungriest of he creditor breed and there are some very good rates available currently. It is not unheard of if your credit is strong to get zero percent or very low rates offered to you with no transfer fees if you move your debt to them. If you can properly manage this maneuver, you can save hundreds or thousands in interest fees. That makes credit cards the best opportunity for neutralizing the interest problem of debt by giving you powerful controls over it.

The downside is these rates are usually short term and rates can go up suddenly. Credit card companies can raise them if you are late with a payment. So you have to manage your debt religiously every single month and once one of your credit resource�s rates shoots up, move that debt quickly to put it in a more accommodating vehicle.

A Home Equity Loan

It isn�t hard to see why these are popular. To the creditor, the loan is secured by your most valuable possession, your home. To the consumer, the rate is often quite favorable compared to high credit card rates. Possibly the greatest advantage in some tax systems is if you put your debt under a home equity loan, you sometimes can use the interest as a tax advantage which is not possible with any of the other systems.

The downside is obvious and serious. You are placing your most precious possession at risk, your home. If the unthinkable happens that you can no longer work and manage that debt, you could loose your home. Bankruptcy cannot help you with this. So think long and hard before going into this kind of loan arrangement and make sure you protect that loan with some insurance to assure your home is not at risk.

Debt Consolidation Services

Debt consolidation services do one thing very well, they advertise. But keep in mind, this is a "for-profit" business and they are going to impose a hefty fee one way or the other to get your business.

Essentially, the debt consolidation loan is extending an unsecured note to you and this
is a high-risk loan to the lender. Anytime that is the scenario, the rates are going to
be higher than the other options. That downside alone makes these services a less
favourable option.

A Retirement Loan

If you have a good sized retirement account like the popular 401k in America, you can take a loan against it. In doing that, you are essentially loaning money to yourself. In this way, you are tapping a resource of your own to help you out of a tough situation. The advantages are the interest rate is usually quite good and you pay the interest into
your retirement account since you are the lender.

However, just as with the home equity loan, be careful with your precious nest egg. If you have trouble paying it back, you could face problems with that account and end up pulling money out at a hefty fee. If you are close to retirement age, you don�t want to introduce any complexities to a fund you need to use in a few years. But if retirement is in the distance and you are doing well with employment and health, this can be a pretty
strong option for you.