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Are you swimming in a sea of debt and know you have to do something, but do not know what would be the best thing to do? There are many opinions on applying for debt consolidation loans or working on the debt you currently have. However, there are a few tips to knowing what is the best thing for your own personal situation.

To Consolidate Or Not?

First, determine your income to bill ratio. This means how much money do you have coming in per month versus how much do you have going out in bills every month. If you have more going out than you have coming in, this is an indicator that you may be a good candidate for a debt consolidation loan. However, there are other criteria to examine before jumping in your car and going down to the nearest bank.

Next, you need to determine how much of your bills are actually considered "debt." There are some things that are not considered debt, but they are bills that occur every month. Such bills are things like utility bills, insurance payments, and childcare. Things that are considered as debt would be credit cards, automobile loans, mortgages, boat payments, or other installment loans. Mortgages are typically between 30 and 35 percent of a family's income. If your payment is higher than that, you are definitely in need of a consolidation loan. Credit cards, automobile loans, and other installment loans should not make up any more than 15 percent of the family income.

Don't run out the door just yet. Before you jump out there and get that loan there is at the very least one more thing you need to determine. You should take a look to see if you can rearrange the way you pay your bills so that you can pay the same amount of money and pay off bills sooner. To some, this is called a "debt snowball." How this works is quite simple. You look at the bill with the shortest payoff date. Usually this is a credit card or an installment loan. If you can focus on getting this one bill paid off quickly, you put the money you were paying on that bill to the next bill with the shortest payoff date. You continue to do this until all your bills are paid off. This often cuts off years of your loans - especially mortgages.

Ok. So you have determined your income/bill ratio, determined which bills are actual "debt," and have looked at doing a "debt snowball," and have decided that it is not something you can do, you can now know that you are in need of a debt consolidation loan. Just realize that when you do sign your name on that bottom line, that you are likely sacrificing time for a lower payment. There are three things that are to be considered in a loan: 1. Rate, 2. Time, and 3. Amount. Two of these things you as a consumer have control over. The third is at the complete discretion of the loan institution. The two you are in complete control over is the time and amount. The one the loan institution has control over is the rate. The only way you as a consumer can affect the rate is to control your credit rating. Even then, the institution has a majority control. So when you sit down at the table, talk openly with your loan officer regarding the time involved and the amount you will pay over the course of the loan, not just the payment plan. Know how much interest you will be paying before you sign. If it is something you can accept, then go ahead with the loan. Just never forget - You are the consumer and have the right to say 'no' to a loan at any time before you sign the bottom line if something does not feel right.

Learn more about this author, Rella Ingram.
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