If you’re struggling to keep up with financial commitments, looking at how get out of debt faster is going to be a top priority. Short of winning the lottery, the most obvious method is probably debt consolidation, but is it the right choice? I wish I could give a definite yes or no answer to that, but no responsible person should give advice without knowing your individual circumstance. The best advice I can give if you are considering debt consolidation is to talk to a professional. In fact not just one, but several – like getting a second opinion from a doctor. What I can do, however, is look at the plus and minus points. Is it one of the quick ways to get out of debt? Are there dangers that aren’t obvious? We’ll assume that you’re now in a debt situation that you can’t get out of on your own. You are either struggling to make payments on your house, car, credit card debt etc, or you are actually falling behind. Debt consolidation – one loan to pay off all your existing debts immediately – seems like a great idea. But let’s look at the negatives. 1. It’s very unlikely that this is actually how to get out of debt faster. Although repayments will be more manageable, the term of your debt consolidation loan will probably exceed existing terms (except credit cards, which of course go on as long as you continue to use them). 2. There is a temptation to get into further debt. If you use the loan to pay off all your credit card debt, what’s to stop you spending on those credit cards again? It would be a pretty stupid thing to do – but it’s a trap that some fall into. Never forget you still owe the money to someone. 3. You may put your house at risk – because in most cases a consolidated loan is secured against it. 4. Overall you might end up paying a greater amount in total than your existing debts.
That will depend on factors like length of term and interest rates, but it’s certainly possible. Before we get altogether too negative, let’s have a look at the positives. 1. Currently you could be paying mortgage, car loans (more than one?), TV, computer or other electricals, furniture or other fittings, home improvements, a couple of credit cards… you’ve got different repayment periods and different interest rates. Debt consolidation rolls them all into one simple monthly amount. 2. Your consolidated debt monthly repayment is less than you are paying now – that’s the whole point of consolidating. You have a single, more easily affordable amount. The interest rate will be lower than things like credit cards. Financial management is easier as a result. 3. There can be tax benefits, depending on your circumstances and location. For some, mortgages are a write-down. Credit card debt is not. If debt consolidation has been sorted out by way of a second mortgage – a common arrangement – that would qualify and reduce your tax burden. So in some ways, debt consolidation could be seen as a win-win situation. You have less to pay out each month so that makes keeping up with payments much easier. It’s not, strictly speaking, how to get out of debt faster – because you are still in debt. What you don’t have is the pressure of that old debt grinding you down because now you can pay it without struggling. As long as you’re careful – and this is very important – as long as you don’t use it as an excuse to get into more debt, it can be the ideal way out.