Debt Consolidation Disasters

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Debt consolidation can be one of the best or worst things that happens in your financial life. There are a lot of companies that will tell you the sunny side. It is possible to restructure your debt and re-arrange your life in such a way that debt consoldiation makes perfect sense.

For the right people, it can be the best possible solution.

But what these companies don’t always like to share is that debt consolidation is not always possible (at least not in a sensible way) for some people. In fact, a lot of people. That’s right, a lot of people who could probably use debt consolidation can’t get it or can’t get it in a form that makes good financial sense.

If you own your own home and have pretty decent credit, debt consolidation is likely to be a good idea, particularly if you’re a penitent debtor who wants to clean up his or her act.

If you don’t own your own home but have pretty decent credit, a good job, and possibly even some collateral (a fat 401.k account, some property even if it’s not your home, etc.), you can probably do well with debt consolidation.

But a lot of people in dire financial straits do not own their own homes, do not own anything that lenders would consider of enough value to hold for collateral, and have pretty mangled credit.

If that last one is your profile, you might be able to qualify for debt consolidation, but it may not be a good idea. If you don’t own anything to use as collateral, the only way for you to get the money to consolidate your debts is to take out an unsecured loan. If you have crummy credit, your unsecured loan is going to come at a high interest rate.

If you just re-structure your debt but don’t reduce the interest on it, you won’t be any better off except you’ll have one payment to sweat each month instead of a dozen.

You may even find that consolidating your debt increases your interest rate, at least on some of the debt, and there’s no reason to go to all of that trouble to pay more than you already owe.

Talk to a credit counselor rather than just the person from the debt consolidation company or go to a trusted financial advisor. Debt consolidation is a great solution for some people! But you need to know if you’re one of them.