What Not to Include in Debt Consolidation

If you've ever seen a commercial for a debt consolidation service, you probably know that many of these services encourage you to consolidate all of your debt in one loan usually by taking out a home equity loan or refinancing your home to consolidate your debt.

Debt consolidation can work well if you're having trouble with a lot of high-interest debt and qualify for a home equity loan or refinance. In fact, many people find that by consolidating their debts, they can get a handle on a financial situation that seemed completely unmanageable.

But when you start thinking about debt consolidation, you should be aware of what works well in a refinance or home equity, and what doesn't. In short, you don't want to put debts into a consolidation plan that will cost you more to pay off than if you had paid them separately.

One example of something that should not be included in debt refinancing is a medical bill, say to a hospital or doctor, that carries no interest. If you consolidate this debt, you will end up paying interest that you would not pay if you paid the debt separately.

Low-interest and no-interest debts like medical bills and student loans are easy to identify as items to leave out of a debt consolidation.

It may be more difficult to identify which items with high interest rates should be left out of your consolidation.

Why, you may wonder, would you ever leave a high-interest item out of a debt consolidation? Isn't that the point, to pay off high-interest items by consolidating them?

That is part of the idea, but the overall idea is to consolidate debts so that you pay less in the long run. If you have high-interest debt that will be paid off in less than a year, it's definitely worth the effort to calculate the difference in cost, overall, of paying the debt separately and including it in a debt-consolidation plan.

Financial difficulties are stressful, and you naturally want to get out from under as much of your existing debt as possible, especially the debt with high interest that seems to be eating you alive.

That is a good strategy, and a fixed-rate home refinance is a very good way to accomplish that goal of getting your debt under control. It's important, though, to make sure that you are consolidating the right debts and not making more difficulties for yourself by consolidating low-interest debts, or even no-interest debts, into a debt-consolidation plan.

Knowing what kinds of debt to include in your debt consolidation can make paying off your debts easier because you're not paying more on certain debts, in the long run, than you should. This makes your long-term debt payoff easier. And because you're consolidating the debts with higher interest, you will be able to make your other debt payments more easily by rolling the high-maintenance debts into one loan with one payment.

The savings to you over time, when you consolidate the right debts the right way, will be enormous. The immediate peace of mind you gain may be even greater.