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Ballast Associates Discusses Types of Debt You Can Consolidate AND How to Know if Debt Consolidation is the Right Choice For You

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Many people are swimming in debt payments, often at high interest rates. As debt mounts, people get to the point where they fear they can no longer make all of their payments. Missed payments affect their credit score.

For some, the answer is to consolidate their debts in one payment each month at a lower interest rate. This provides them relief so that they can begin to actually attack the principle and pay down the debt.

Here at Ballast Associates, advisors to people in debt, we are often asked what types of debt can be consolidated. We are often also asked under what circumstances is debt consolidation a good idea.

Types of Debt That Can Be Consolidated

According to Money Meters, the types of debt that can be consolidated are mostly unsecured debt. Unsecured debt is a debt that does not require you pledge to give up possession of an asset if you can no longer make the payments. Secured debt is debt in which you are agreeing to give up an asset if you cannot make the loan payments. Common forms of consumer secured debt include mortgages and auto loans.

Examples of debt that can be consolidated include:

  • Credit, retail, department store and gas card debt
  • Private student loan debt
  • Personal loans that are unsecured
  • Personal lines of credit
  • Medical and hospital bills
  • Rent that is in arrears
  • Utility bills, including cell phone charges
  • Income taxes
  • Auto loan payments in arrears

Debt you cannot consolidate includes:

  • Mortgage loans
  • Home equity lines of credit
  • Automobile, boat and RV loans
  • Government loans
  • Secured IRS liens and back taxes - This is when you receive a federal lien form for your back taxes.
  • Debt from lawsuit judgments

As you can see, most unsecured debt can be consolidated. The secured debt that most people carry mostly cannot be consolidated. It is usually not a problem that secured debt cannot be consolidated because the interest rates on secured debt, such as mortgages and automobile loans, tend to be lower and the payment term is often longer.

When is Debt Consolidation a Good Idea?

According to Nerdwallet, you should only consider debt consolidation if the following applies to your situation:

Debt-to-Income: You need to have a debt-to-income ratio, not including mortgage or rent, that is not larger than 40 percent of your monthly gross income.

Credit-Worthiness: You can qualify for either a 0 percent balance transfer credit card or a low interest, personal debt consolidation loan.

Cash Flow: You can always service your debt payments.

Debt-Free: You will be able to resist running up the debts on your credit cards while you are servicing your debt consolidation loan. If you start spending with the credit cards while you are trying to pay off your debt consolidation loan, you will end up in further economic jeopardy.

The great thing about debt consolidation loans, if you can resist running up more unsecured debt, is that you have a finite term within which you know you will have the debt paid off. If you stay with the credit cards and other unsecured debt with high interest rates, you will be less able to attack the principle and will likely remain in debt for far longer. Some never quite pay off their credit cards and are stuck in those high interest rate payments terminally.

Tips to Stay on Track

If you get a debt consolidation loan, here are a few tips to stay on track and keep yourself from running up more credit card spending:

  • Put your credit cards in a drawer for now or just take one for emergencies only
  • Save up an emergency fund for automobile repairs and other unplanned expenses
  • Learn your overspending triggers and avoid them.

At Ballast Associates, we are here to help if you are drowning in debt. Contact us with any questions you may have.

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