How Does Bill Consolidation Work

Is Bill Consolidation Right for You?

How do you know if bill consolidation is right for you?

• The new loan offers a lower interest rate. This may seem like an obvious conclusion, but many people might actually jump at the chance to consolidate their bills – even at a higher interest rate – because they see it as a way to streamline their financial situation and reduce their overall monthly payments. Unfortunately, while accepting a consolidation loan at a higher interest rate may provide some immediate relief, it likely will cost you more in the end. Do the math before you decide to accept the deal.
• You have the discipline to control your spending. Some would argue that someone in debt up to their ears has obvious spending problems. That’s not true if the reason you’re in debt is due to an unexpected emergency, a loss of a job, and/or another unfortunate circumstance. If your debt is not due to overspending and you rid yourself of all your credit cards, develop a budget, and can monitor your own spending, consider bill consolidation.
• You’re many years away from paying off your debt. When we say ‘many years,’ we mean more than seven. It might seem painful to continue on your current road, but you know what they say about slow and steady winning the race. Ultimately, you are more likely to save money by paying off your current debts than by consolidating and locking yourself into a single, longer-term loan.
• You’ll be able to afford the new monthly payment. Generally, your property is the collateral used for your secured loan. Therefore, if you cannot afford the new monthly payment you place your home at risk. Instead, you may want to consider an unsecured loan. Keep in mind that unsecured loans have no collateral to back them, so they have a higher interest rate.
• You cannot afford to make the payments on your current debts. One of the primary reasons for consolidating your bills is to make your monthly payments affordable. However, this cannot be the only reason. All these other factors need to be part of your decision-making process, too.

Do-It-Yourself Consolidation or Select a Bill Consolidation Company?

• Make a list of debts. Include all creditors, current outstanding balance, current monthly payment, interest rate, anticipated payoff date.
• Make a list of income. Include all sources, frequency, and amount.
• Review your financial situation. Once you have all the information, you can determine how the five factors above affect you and whether a bill consolidation loan is the right move for you.
• Ask creditors to reduce the interest. Before you decide to consolidate, ask each of your creditors about a reduction in your current interest rate. Credit card companies especially don’t want to lose your business. You may find you can get a better deal and forgo a loan.
• Seek a consolidation loan. The best place to start is with your current lender, whether that is the group who holds your house note, the financial institution that gave you the car loan, or the bank where you have your checking and savings accounts. Homeowners may want to get a home equity line of credit (HELOC) or a cash-out refinance.

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