People all around you have probably told you how they got out of debt by opting for a debt consolidation plan. It’s probably tempted you to go in for one too to get out of your mounting debt problems. But how do you know if it’s right for you?

Do you qualify for debt consolidation?To qualify, you need to be heavily in debt and unable to pay your debts on their current terms without causing a financial hardship. If you are not neck-deep in debt, debt consolidation companies will not consider you to be right for their services. Use this checklist to see if you do qualify for debt consolidation:

• List all your secured and unsecured debts and make an outstanding balance for each type of debt.
• Tick off the debts you want to consolidate.
• Examine your credit reports so you know all the debts that are listed there before applying for a debt consolidation loan.
• If you have any collateral to put up, decide on it now. If you have no collateral to show, go in for debt consolidation.
• You need to submit proof of income and a copy of your budget to qualify for a consolidation loan. Lenders usually ask to see a copy of your budget or a list of your monthly expenses so that they can understand how much you can pay back each month.

How it helps you: Through debt consolidation, you pay back one small installment each month. This gives you a certain amount of savings every month, plus you can quickly get rid of some debt collectors. By this means, your credit rating will increase and your credit report will start to look encouraging. The higher your credit rating, the easier it will be for you to get loans in future.

Advantages of debt consolidation:

• The first big advantage is that debt consolidation helps you improve your credit.
• It also gives you cash in hand to spend since you only pay back a small amount each month.
• It saves you from bankruptcy.
• It helps you maintain a good credit rating and to combine all your payments into one.

Disadvantages of debt consolidation:

• Your credit will be affected if you do not pay regularly.
• If you opt for debt consolidation secured by your home, filing bankruptcy may be difficult
• You cannot default on your loan since the debt is now in the hands of a debt consolidation company, not your original creditors.

Tips to deal with debt consolidation:

• Find out the real cost of paying off your debts.
• Don’t accept a debt consolidation package that does not match your current financial position.
• Spend a few hours a day reading and understanding the terms and conditions of the debt consolidation package and find out its positive and negative points. Then, ask the debt consolidation company of your choice to help you decide.
• Compare the options of competitive agencies before deciding.
• Just because debt consolidation is the recourse others take doesn’t mean it’s right for you too. Explore other alternatives that may suit your financial position.
• Change your spending habits, curbing them as much as you can and spend only on what you need.
• Once you’ve paid your debts, don’t get back into debt. Remember how difficult it was for you to regain your independence from debt and avoid it at all costs.