Debt Consolidation – Is it the right move for you?
What is debt consolidation?
Taking on a debt consolidation loan is an effective way of amalgamating numerous smaller or medium-sized debts with higher interest into one larger debt with a lower interest rate. This is appealing to those who are finding it tricky to keep on top of managing several debts, or might miss the odd repayment every so often due to losing track of what is owed to whom and when.
Can it save you money?
In many instances, yes. Missed payments mean damaged credit ratings and also payment penalties. Debt consolidation removes the risk of attracting these unwanted extra costs as well as often reducing the amount of monthly repayments by stretching repayments over a longer time with less interest.
What is your ultimate objective – to have lower monthly payments or to pay down the debt faster?
The answer to this question is crucial to making your decision on debt consolidation. If you want to have lower payments, a decreased interest rate will give you more breathing room to use extra cash for other purposes.
If your goal is to be debt-free sooner, a lower interest rate can also be an effective way to directly funnel savings made on interest into the loan principal and pay down the balance quicker.
The importance of being disciplined
Consumers entering into debt consolidation agreements need to be disciplined with their finances and realize that debt can only be tackled with careful money management and a new approach to finances.
For example, a consumer using a debt consolidation loan and balance transfer from credit cards needs to destroy the old card that now has a zero balance. The temptation for the spendthrift is to begin using the credit card again, but this has obvious perils.
Don’t fall into this trap – the moment you begin mounting up debt again, you will effectively undo the benefit of the debt consolidation. You may find yourself in poor financial shape again very quickly. Remember that any seemingly “extra” cash you have from debt consolidation loans is not yours – it is for your debt. Put the money to good use and avoid the pitfalls of over –spending once again.
Vow to cut up the cleared credit cards up once the balance is paid down and close the account. To be debt free, you need to be ruthless!
Remember that debt consolidation is a partial solution
Merely consolidating debt without making real changes to spending habits will not solve the problem in its entirely. It is not possible to be fully free from debt without first combatting the problem at the grassroots level – overspending. If you have been living beyond your means and spending beyond your income, this will have to stop in order to carve out a better fiscal future.
Be honest with yourself about your spending habits and get real. Make a budget that will help you achieve your goal of being debt-free and monitor your successes in order to feel more motivated.
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