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DIY Debt Consolidation Pros and Cons

3 ways to weigh the benefits and risks of consolidating debt on your own.

When it comes to solving financial challenges, most people would prefer to do it themselves. Sharing your financial situation with an outsider and asking them to help you solve the issues it can include is often an emotional and mental hurdle that people have to overcome when asking for help to find debt relief.

On the other hand, trying to tackle debt problems on your own isn’t always the best choice. In some cases, choosing the wrong option for debt relief in your specific financial situation has the potential to make the challenges you’re facing with debt worse instead of better. So you have to consider your options carefully before you make the decision to consolidate.

1. Are you increasing your finacial risk?

If you have debt to eliminate, you already have one challenge to overcome. You don’t want to put yourself into a riskier situation by consolidating your debt – a situation where if things go wrong, you’ll come out worse than you would have if you never consolidated.

This is why experts recommend against using something like a home equity loan to consolidate credit card debt. In most cases, credit card debt is unsecured, meaning that as much as a debt collector may threaten you they can really only take property or garnish your wages with a court order. In other words, if you don’t repay the debt they have to sue you in civil court to recoup their losses.

However, if you consolidate credit card debt using a home equity loan you effectively convert that unsecured credit card debt into a secured loan. If you fail to repay the loan, then your lender has the right to start foreclosure proceedings on your home without any need for a court order. You essentially put your home at higher risk of foreclosure to eliminate the balances on your credit cards. Given the potential for unemployment or an accident that leaves you unable to work even if you can make the payments on the loan now in most cases it’s just not worth the increased risk.

2. Are you limiting debt relief options down the road?

Another situation you want to avoid is limiting the options you have available for debt relief once you’ve used the option you’re considering now. For this example, we’ll look at student loan debt consolidation.

It’s possible if you have student loan debt that you can carry both federal and private student loans. Federal loans are Direct, Stafford, FFEL and PLUS loans for parents and graduates. Private student loans come through a financial institution or private lender. Some borrowers just have one type or the other, but some have both.

Once you begin repaying your loans, you may decide to use debt consolidation to make it easier. There are five federal student loan repayment plans that allow you to consolidate federal student loan debt, but won’t apply to any private loans you hold. By contrast, a private consolidation loan provider will be more than happy to consolidate both for you, but there’s a catch…

If you consolidate federal student loans into a private consolidation loan, those loans effectively become private. That means that later if the consolidated loan still isn’t working for you to eliminate your debt, you won’t be able to use those five federal programs. What’s more, if you’re a public servant, you also make yourself ineligible for public service student loan forgiveness programs that the federal government also offers.

This is why experts recommend that you keep federal student debt in federal repayment programs and avoid converting it to a privately-held debt. If you have both types of student loan debt, consolidate your private loans together and use a federal repayment plan to pay off your federal loans.

3. Are you overpaying to consolidate?

When weighing do-it-yourself debt consolidation pros and cons, two of the largest determining factors are your credit score and your personal budget. You need a high credit score to qualify for DIY debt consolidation options at the right interest rate and then you need cash flow available in your budget to cover the consolidated payments. If the interest rate on your consolidated debt is too high or the monthly payments that you can afford are too low, then the only way to make the payments more manageable on your budget is to extend the term on the debt repayment – i.e. you pay the money back over a longer period of time.

The issue with this is that at a certain point, you can extend the repayment schedule so far that you end up paying a significantly high amount of interest charges in order to eliminate your debt. In worst-case scenarios, total interest charges can exceed the principal (original debt owed). So even though you only owe $10,000 in credit card debt but you wind up paying $25,000 or more in total on a consolidation loan to pay off your debt.

In this case, do-it-yourself may not be the right option for you. Instead, you need to work with a specialist to develop a plan that pays off your debt in a manageable way that doesn’t lead to excessive interest charges. This is particularly true for credit card debt, where you have assisted consolidation options like a debt management program that can give you the edge you need in eliminating your debt.

The reason a debt management program may be a better option for consolidation than DIY solutions is that you have a credit counseling agency working with your creditors as a go-between to negotiate on your behalf. In other words, credit counseling agencies have worked with your all major creditors and even many smaller creditors to help other clients.  As a result, those creditors are willing to reduce or eliminate the interest rate applied to your debt because they know your enrollment in the program means you’ll more likely to repay what you owe.

Talk to a certified credit counselor to see if DIY debt consolidation is right for you.