To consolidate or not? I’m thinking about getting one payment for my cars and credit cards.
A: Debt consolidation can offer relief from high payments, high interest rates and stress, at least in the short term. It’s important to take the time to determine whether consolidation is appropriate, and if so, what type of consolidation. In these tight credit markets, many lenders will not provide a consumer with an unsecured consolidation loan. Instead, lenders are looking for real estate or other forms of collateral to secure a loan. Converting unsecured debt into secured debt may not always be the best choice. Some people may find themselves slipping back into old spending habits after getting instant relief from a debt consolidation loan and end up with more debt than when they started. There are three additional questions to ask when considering loan consolidation:
• Are my interest rates being reduced?
• Am I lowering my monthly payment?
• How many years will I be paying on this debt?
Once you have answers to these questions, weigh the benefits against the consequences. It’s important to keep in mind that most car and credit card loans are short-term debts designed to be paid in full over three to five years. If you restructure the debt to be paid over 10 to 30 years, your payment will drop but the amount of interest you pay over time will increase significantly. There’s a reason we don’t see too many 30-year-old cars on the road these days. An alternative for you to consider may be a debt management plan through a local nonprofit credit counseling agency. A debt management plan offers significant relief from your debt load and stress with minimal impact to your credit standing.
Chad Gentry is executive director of Community Credit Counseling Services in Lakewood.
