The majority of Americans are up to their eyeballs in debt. Over forty percent of American households actually manage to spend more per year than they bring in. It doesn’t take a rocket scientist, or even an economist, to figure out that’s a recipe for disaster. It’s no wonder we have so much economic stress when the average household in our country carries more than $8,000 in credit card debt alone. That says nothing, of course, about mortgages, car loans, personal loans, or any other kind of debt.

One of the best ideas ever introduced on the American financial landscape, if it’s used properly, is the debt consolidation loan. There are many different ways you can work these loans. Some people roll them into a second mortgage, others essentially take large personal loans to wrap all of their other debts into one package.

Most importantly for most Americans, a consolidation loan can be used to roll all of that credit card debt into a loan with considerably lower interest. Credit cards are convenient, but if you don’t pay off your balance every month, you can get slapped with some incredibly high interest rates. Consolidation loans help to lower what you’re paying in interest.

If you think you might want to take out a debt consolidation loan, gather all of your bills and figure out exactly what your outstanding balance is. Then figure out what your monthly payments are, and how long you will need to make those payments. This should give you something to compare with the terms and figures of your consolidation loan.

Talk to several lenders. Don’t apply for the actual loans until you have compared loan rates. Making out several loan applications can actually negatively affect your credit score. Find out what typical loan rates are for people with your credit score. If you don’t know your credit score, you can find out what it is online through Equifax, Experian, or one of the other credit reporting bureaus.

After you have compared the rates of several lending institutions, apply for a consolidation loan with the one which offers you the best rates and terms. Usually this is a simple matter of comparing the numbers, though there may be other factors as well. Ultimately, you should take your loan out with whomever you are most comfortable dealing with.

If you do get a consolidation loan, do yourself a favor: Don’t incur more debts, at least until after you have paid it off. Too many people make the mistake of getting a consolidation loan, then taking the excess money they have and immediately using it to justify borrowing more money. Soon, they are up to their eyeballs in payments again. Wait to borrow more until you pay off what you already owe.

Image by Andres Rueda

Here are some things to think about when you’re considering whether or not to take the personal loan plunge:

• Understand the terms of the loan. Otherwise, you could wind up paying more in interest in the long run. For example, you might have a variable rate loan. That means that the rate on your personal loan could go up at intervals specified in your loan contract. If the debt you’re paying off is at a fixed rate that won’t change, your personal loan rate could conceivable catch up to and even pass your other debt. The same holds true if the personal loan has a low introductory rate that will automatically go up significantly after a period of time.
• Be sure you can afford the personal loan. In theory, by paying off other debt you’ll reduce your overall monthly obligations. Still, if you don’t have the budget to make the personal loan payment, you aren’t going to be any further ahead. If you can’t make the payments, you might consider turning to other solutions, such as consumer credit counseling, before you turn to a personal loan to solve the problem.
• Don’t build your other debt back off. What happens, in some cases, is that a person will take out a personal loan to pay off their credit cards. Then, because their credit cards are paid off, they wind up going back out and racking up a bunch of additional credit card debt. Then, you’re further behind than when you started. Some lenders will even require that, if you’re taking out a personal loan for the purposes of consolidating debt, that you close the accounts that are being paid off as one of the conditions for approval of the personal loan. If you’re likely to go out and build your debt again, you’re better off not taking the loan in the first place.

Photo via quaziefoto

An average college graduate today has a debt of over $23,000. Much of this debt takes the form of student loans, but a significant portion can be from personal loans or other types of credit.

The good news is that graduates have some choices about how to best manage their debt. Figuring out what the best options are can be challenging, however. There are all sorts of loan options on student loans, and a college grad has to be smart in order to avoid getting into trouble with their debt.

Separating Debt

The first step in address student loan debt is just figuring out what you have. You’ll need to sort your debt into categories. There will be Perkins loans, subsidized and unsubsidized Stafford loans, personal loans and credit cards.

Perkins loans, for example, are low interest loans and you’ll want to pay those off last. Credit card debt tends to be at a much higher interest rate.

In between those are the Stafford loans. The government pays the interest on subsidized Stafford loans, but the interest is just added in with unsubsidized Stafford loans. This, then, means you need to pay back these loans as soon as possible.

Personal loans fall somewhere in the middle, too. The key is knowing what your interest rate is and how it compares with your credit card debt and your unsubsidized Stafford loans. Ideally, you’ll pay off the credit with the highest rate soonest.

Repayment

Once you have a plan in place, you can begin repayment. With your student loans, you may have the option to repay your debt over 10 years, over 30 years, or to defer your loan payments altogether. If you’re under economic hardship, for example, the student loans may be held off for a certain amount of time.

The key is, with all of your debt, to make sure you’re paying on time and communicating with your creditor if that’s not possible.