Consolidate Your Debt with a Personal Loan on 02/21/2011

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Most people have multiple credit cards, and many are constantly carrying a balance on one or more of them. Add to that one or more car payments. Now pile on some student loans. Before you can say “interest rate,” you can be swimming in debt and battling to keep your head above the monthly flood of bills.

If you’re paying interest on multiple debts, particularly if some are from high-interest credit cards, consolidating those debts into one more-manageable loan may be a wise idea. But there are smart and not so smart ways to consolidate.

Not So Smart:

If you’re looking to consolidate, a debt settlement service is an option. But it’s risky. Just think about it: You’re in the unfortunate situation of having too much debt in too many places. These guys look like they’re going to help you out, but they’re designed to profit from your debt and misfortune. Multiple bills are hard to manage, but with debt consolidation you may end up paying less towards the overall principle each month. With a debt consolidation service, you’ll likely be moving all your debt to one high interest loan that shrinks your principle too slowly and bites you in the long run. Adding insult to injury, many debt consolidation companies deduct a fee (as much as 10% or more!) from every payment you make, resulting in even less money going to that principle you so desperately need to pay down.

Use Caution:

Consolidating by credit card with a low-interest, balance transfer is another risky option, one that could leave your credit rating with two black eyes…or worse. Just remember, your low-interest card will rocket to a high-interest rate sooner or later (often within just a few months). If you’ve consolidated a fairly small amount of debt and can pay it off quickly, a balance transfer will serve you fine. Otherwise, the balance transfer approach will have you back-peddling around the ring as you dance from card to card. You may avoid the interest-hike sucker punch, but your credit rating will take a beating in the process.

The Smarter Options:

There are better ways to consolidate. You could take out a home equity loan and lock in a low interest rate. Just keep in mind that doing so will result in a long repayment period and likely paying more over the long run. You could refinance your car. Or you could approach a friend or family member for a personal loan.

Friend and family lending mixes personal relationships with money matters, which always carries its own unique type of risk. If a personal loan from friends or family is your solution to financial pollution (i.e. debt that stinks to high heaven), use a friend and family lending service LoanBack is a good one—to ensure there are no misunderstandings. Such a service will help you create a legally recognized loan agreement, calculate your interest rate, and track repayment. Getting a loan from a family member or friend can be a great option that consolidates your payments, lowers your interest, and improves your credit rating while keeping you out of that often-shady debt consolidation business.