How To Determine Whether Debt Consolidation Makes Sense
Whether debt consolidation makes sense or not can really only be determined by the debtor. When it comes to a consolidation, debtors have two options, which will be discussed here, but as to whether debt consolidation makes sense, period, will come down whether it improves the debtor’s finances. With that objective in sight, the following considerations need to be reviewed.
The first is whether a debtor can and should use the equity in their home to pay out their consumer debt. Although this was the topic of a recent article, borrowers should always use their equity if it means improving their financial wherewithall. The reason? Cutting total interest costs paid to lenders and improving monthly cashflow for the household.
In this case, whether debt consolidation makes sense will depend on how the debtor can curtail (or ideally eliminate) future consumer debt. Debtors who simply rack up more and more in consumer debt following a debt consolidation will simply erode their net worth on a continual basis and, truthfully, their problem is not a debt problem, it is a spending problem.
Second, if the debtor cannot secured a loan with home equity they may have to resort to an unsecured debt consolidation loan. In such cases, unsecured debt consolidation loans probably will not yield much better rates. So the question to ask will be whether or not a consolidation will improve cashflow.
With cash flow as the only possible benefit, deciding whether debt consolidation makes sense becomes extremely easy. Simply compare all currently payment outflows to the payment on the new, proposed consolidation loan. If the loan payment is lower, then the debtor will experience an improved cash flow. The question, however, really becomes whether the improvement is sufficient to the debtor afloat throughout the month. In cases where it is insufficient, debtors will need to examining other options.
Evidently, debt consolidation through home equity makes the most sense when consider both cash flow and total interest costs. When this is not an available option, borrowers need to decide whether debt consolidation makes sense through an unsecured loan. Often, only cash flow will come into question as rates will typically be higher. Options are available through specialized lenders, however (see below) where rates are usually lower than typical unsecured loans.
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