The situation outlined in Why Debt Consolidation Doesn’t Work…Usually is pretty typical, but if you want to do a debt consolidation this doesn’t have to be your reality. You can make it work, but there are a few things you need to put in place to make it happen. Here are a few tips to help you succeed in your debt elimination effort.


Make the Highest Monthly Payment You Can Afford

A debt consolidation should be used to eliminate your debt not make it easier to live with. While it’s okay to set the payment below the combination of the debts you’re consolidating if you have to, you might be doing little more than moving your debt from one pile to another. You need to be steadily chipping away at the principal balance.

Make the Term as Short as Possible

Five years or less is a visible horizon that anyone can aim for. If you have to extend it out longer (for qualification purposes), plan to make regular additional principal payments to pay it off in less. The longer a consolidation loan hangs out there the greater the chance that it will fail to do what you hope it will. One more thing: make sure the loan has no prepayment penalty.

Use a Fixed Rate Loan

Any kind of loan can be used for debt consolidation, but some loans are better than others. Fixed rate loans have two major advantages:

  1. they have fixed monthly payments and
  2. they are self-amortizing.

Revolving loans like HELOCs and credit cards usually lower the payment as the balance falls. This keeps you in debt longer, as well as allowing you to add more debt. You don’t want either of those options, even if they seem easier.

Cut Your Living Expenses

Remember that pain thing I was talking about earlier? You most likely got into debt because your expenses exceeded your income for an extended period of time. Unless you reverse the pattern your debt consolidation will fail. The consolidation should be viewed as a financial time out. You get a break to learn to live on a budget and allocate any extra money to either paying off the consolidation loan or building up savings so you won’t have to rely on debt in the future.

Increase Your Income

Getting extra cash early in the process may be the critical factor that makes the whole consolidation work.

  • Get a second job,
  • start a side business, or
  • sell some of your unneeded possessions.

This can help you to get a few dollars in the bank ensuring the long term success of your consolidation. You could also prepay as much of the consolidation loan as possible early on. If you’re using a fixed rate loan any prepayment of principal will shorten the term of the loan — and that’s what you want to do, any way you can!

There’s an upshot to all of this too. If you can successfully implement these changes and make the consolidation work the way it should, you’ll be better trained and prepared to deal with all things financial for the rest of your life. In that respect the effort is about much more than just debt consolidation.

Have you tried a debt consolidation? What advice do you have for others who might be considering it?

Photo by alancleaver2000.