Is debt consolidation necessary?

[solomon]

Hello everyone,
What is debt consolidation.?And is it necessary to get out of debt..?

[maat55]

Debt consolidation is you paying a company to settle and pay your debts. It is not uncommon to be ripped off when using debt consolidation.

This is something you can do for yourself. List your debts, expenses and income in a help thread and you will get help from people on this board as well.

[dczech09]

maat55, you are incorrect. Debt Settlement is when you pay a company to negotiate and settle debts on your behalf. Often times, you pay your monies to the settlement company who then distributes money to your credits through a payment plan. This is extremely risky because there is a lot of fraud out there and this debt strategy will trash your credit.

Debt Consolidation on the other hand is when you combine debts into one. For example, lets say you have an auto loan, a student loan, and credit card debt. Banks may try to sell you a home equity line to use to pay off your debts. Now instead of having all those debt accounts, you only have one large debt with one payment.

The problem with debt consolidation is that you only treat the sympton, not the actual problem. A lot of debt is a sympton of a larger problem: overspending and undersaving (Dave Ramsey).

If someone consolidates debt but does not actually change spending/saving habits, what do you think will happen over time? The original debts will grow back; namely the credit card debt.

So is debt consolidation necessary? While it may be a good tactic for someone to use if they make it part of their overall strategy, I would not say it is necessary. The most necessary part of becoming debt free and staying debt free is to develop self-control and discipline.

[disneysteve]

There are numerous potential problems with debt consolidation. The biggest is when you turn unsecured debt, like credit cards, into secured debt with a home equity loan.

While consolidating to lower your interest rate might not be a bad idea and might help you repay your debt faster, just remember that you can not borrow your way out of debt. As dczech said, if you don't fix the spending problem, no consolidation loan is going to help.

[maat55]

[quote]

Originally Posted by dczech09

maat55, you are incorrect. Debt Settlement is when you pay a company to negotiate and settle debts on your behalf. Often times, you pay your monies to the settlement company who then distributes money to your credits through a payment plan. This is extremely risky because there is a lot of fraud out there and this debt strategy will trash your credit.

You're correct, my bad. You are basically consolidating your debt when you use debt settlement or do it yourself. My mistake is in assuming he wants outside help.

[jpg7n16]

Originally Posted by solomon

Hello everyone,
What is debt consolidation.?

Getting 1 big loan to pay off several small loans. As described above. (10 separate credit cards --> consolidated into --> 1 big loan)

And is it necessary to get out of debt..?

Absolutely not.

The best thing to do is pay as much money as possible towards the debt whenever you can.

So don't attempt to free up cash by lowering the amount paid towards the debt; attempt to increase the amount paid towards the debt, by freeing up cash elsewhere.

[annalaurab]

If you are in the worst case scenario though and cannot pay the minimum no matter what you can either temporarily negotiate a lower payment or try credit counseling.

[glock35ipsc]

Originally Posted by jpg7n16

Getting 1 big loan to pay off several small loans. As described above. (10 separate credit cards --> consolidated into --> 1 big loan)

^^ This. And another big problem I have seen is when someone consolidates a bunch a credit cards into one loan, they won't close the credit card accounts. Then the debt slowly (or rapidly) grows back. Now they are in WORSE condition!

Do it yourself, and pay off your own debt without taking on any new debt!

[Hunters]

After some time the debt consolidation industry took hold of the public's imagination. Most people finally seem to understand that, after 2005 congressional legislation, bankruptcy no longer promises anything to ordinary consumers beyond increasingly dear attorney fees, and, if recent studies are true, our national obsession with unsecured debt continues unabated.

[cjscully]

Originally Posted by maat55

Debt consolidation is you paying a company to settle and pay your debts. It is not uncommon to be ripped off when using debt consolidation.

This is something you can do for yourself. List your debts, expenses and income in a help thread and you will get help from people on this board as well.

Originally Posted by dczech09

maat55, you are incorrect. Debt Settlement is when you pay a company to negotiate and settle debts on your behalf. Often times, you pay your monies to the settlement company who then distributes money to your credits through a payment plan. This is extremely risky because there is a lot of fraud out there and this debt strategy will trash your credit.

Debt Consolidation on the other hand is when you combine debts into one. For example, lets say you have an auto loan, a student loan, and credit card debt. Banks may try to sell you a home equity line to use to pay off your debts. Now instead of having all those debt accounts, you only have one large debt with one payment.

The problem with debt consolidation is that you only treat the sympton, not the actual problem. A lot of debt is a sympton of a larger problem: overspending and undersaving (Dave Ramsey).

If someone consolidates debt but does not actually change spending/saving habits, what do you think will happen over time? The original debts will grow back; namely the credit card debt.

So is debt consolidation necessary? While it may be a good tactic for someone to use if they make it part of their overall strategy, I would not say it is necessary. The most necessary part of becoming debt free and staying debt free is to develop self-control and discipline.

Maat55 is partially correct. Nearly every debt relief program out there has been marketed at one time or another as "debt consolidation", so much so that the term has become muddled. The Debt Management plans offered by credit counseling services are marketed as "consolidation." Loans, both secured and unsecured are marketed as "consolidation loans." I've seen finance companies offering "debt consolidation loans" that are unsecured and carry interest rates on par with credit cards! Even the credit card companies have promoted the idea of consolidating your credit card debt by transferring the balances over to a single card. And yes, debt settlement companies have marketed their services as "consolidation" as well.

As for debt settlement itself, if it is used in the appropriate circumstances it doesn't trash your credit any more than doing nothing will.

Consider a person who has experienced a long term loss of income and can only cover the barest necessities of food, shelter, clothing, transportation, etc. After cutting all spending to the bone there just isn't enough income to make the monthly payments on all of the debts. This person is going to end up with trashed credit no matter what. Some payments are going to be missed, some accounts are eventually going to charge off and go to collections, he/she might even be sued by a creditor that isn't getting paid. What does such a person do in these circumstances, particularly if they want to try and avoid bankruptcy? Debt settlement may provide the alternative such a person needs.

Unfortunately dczech is right about the fraud out there. There are debt settlement companies out there that make all kinds of claims about their services and the results they can get that are flat out lies. That fraud does not mean that debt settlement is an invalid approach to this kind of debt problem. In fact, one of the biggest lies debt settlement companies tell is that they can do a better job settling your debt that you can. The truth is that the individual debtor can get the same settlements the debt settlement companies can by negotiating with creditors directly.

Equally correct is that no matter which debt relief option a debtor uses he/she must also address the spending problems that must have existed when the debt was incurred. Failing to do so will inevitably result in more debt in the future.

In answer to the question in the original post - debt consolidation, debt settlement or bankruptcy may be necessary to get out of debt if the problem is dire enough. For most people it is not necessary at all.

[pneely]

If you have to do debt consolidation, go with a non-profit, or rigorously check the background of the company you are considering online (Better business bureau, local chamber of commerce, FTC).

And remember, debt consolidation ONLY works if you turn your spending around. If you continue to spend more than you earn (after taxes), you are just extending the problem.

[Phineas]

It is not necessary to consolidate your debt . ( hope you know what it is as maat and others have described it ) but it is good to consolidate your debts atleast once a year . It really helps in your future financial planning .

[Bastille]

Debt consolidation necessitates the taking out of a single loan to settle other outstanding loans. A good example would be rolling all your credit cards and unsecured personal loans into a single personal loan. The result is that you will have one new single loan

[hassell]

I think that one should try his best to avoid debt consolidation loans and programs like this. Its better to try and earn some money and pay off the debt.In case nothing is coming to your way, you can go for debt consolidation as the last option only.