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Understanding Debt Consolidation

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Be smart about getting rid of debt

This past August, Reuters reported that consumer debt in America dropped to $11.4 trillion and non-real estate debt had fallen to $2.28 trillion. While these numbers show the level of debt in the average American household falling, many families still feel out of control when trying to manage and repay their debt.

Consolidation loans have helped some consumers reorganize their debt repayment schedule and take control of their financial situation, when previously their debt had held them hostage. But that doesn't mean every offer for a consolidation loan is a good idea.

Debt Consolidation Firms

While some debt consolidation firms offer a useful service, others tack on fees and interest charges that can actually increase the amount of debt you have, while they promise to work out deals with your creditors and reduce your debt. A quick search of the Federal Trade Commission website turns up pages of court cases against debt consolidation firms. In many instances, if the consumers had adjusted their budgets and called their creditors to work out payment arrangements and settlements themselves, they could have done a much better job of reducing their debt and paying it off - without the additional fees.

Better Options for Consolidation

Your financial institution can assist in providing debt consolidation options you may not have considered. Home equity loans can be used as a form of secured debt consolidation for those with higher debt. Since equity loans generally carry a much lower interest rate than credit cards do and the interest paid can be tax-deductible, this is a good option for many. Personal loans can also be a helpful in consolidating high-interest, revolving debt. And your bank/credit union also may also be able to inform you of options for refinancing not only your home, but your car loan as well.

Other Things to Consider

It's a good idea to call all your creditors to see if you can work out your own reduced balance and interest deals. When multiple payments to several different creditors are making you frazzled, you can always schedule auto payments through your financial institution. If the purpose of the arrangement is to consolidate student loans, check to see if you qualify for a Direct Consolidation Loan or a Federal Family Education Loan through the Department of Education. If so, compare those rates with other consolidation options before you commit. Be sure to speak with us today and we'll help guide you.

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