Positives and Negatives of Debt Consolidation

Debt consolidation can be a great option if you are looking to reduce the interest rate on your unsecured debt and reduce the time it takes to pay off the debt. As with any solution, there are positives and negatives that should be carefully weighed.

Let's consider a few. Debt consolidation can be done with loans or through a debt consolidator that negotiates lower interest rates with our creditors and helps manage the payments to creditors. There are points on both sides of the coin:

On the positive side:

Debt consolidation allows you to combine all your unsecured debt into one place. This creates one payment.
Depending on the consolidation method you choose, you may get a tax break. The interest on a home equity line of credit (heloc) is tax-deductible.
A good debt consolidation program will shorten the time to pay off the debt by reducing the interest.
If you choose to use the services of a debt consolidator, you get a counselor to commit with you to help you meet your goal to become debt free.

On the negative side:

Any method to consolidate, be it through a program or through a home equity line of credit (heloc), has some negative effect on your credit score because it shows more access to credit. It could be short-term depending on your actions or it could be longer.
A loan tied to your house like a heloc has a variable interest rate. The loan repayment is generally interest only. If you want to reduce the balance, you have to calculate the payment amount that needs to be paid above and beyond the interest to create a pay-off in a certain amount of time. If you don't have the discipline to pay more than the minimum or to stop charging on your accounts, this can be a toxic solution.
It can be difficult to navigate the system and figure out the debt consolidator or program that will actually reduce the term of the debt and interest rate.

Anything in the financial arena can have sharks swimming in the water at the smell of blood (and let's face it, who doesn't have a little bit on blood loss from the current market) threatening to take your hard-earned money without providing a legitimate service or valid solution. The best weapon a consumer has against the sharks is knowledge. You should know the right questions to ask and know what your responsibility will be once you proceed with a service. As the consumer, you have the power. Find out the terms of any program offered to you. Give the service provider enough information to fully evaluate your situation and see if their responses make sense for you.