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If your debts are dragging you down and there seems to be no end in sight, it’s easy to be tempted by the solutions offered by debt consolidation loan companies. There’s no doubt that these loans can ease your worries and lead to a clearer financial future, but they can also make a bad situation worse.
Approaching debt consolidation with care is key to putting an end to your money problems. What do you need to know to make it a success?
The Aims of Debt Consolidation
The basic idea of consolidation is to take out a single large loan which you use to clear all your other debts. For it to work out, your new monthly repayment will need to be less than the total of your current ones. This can be done in two ways.
1) Finding a loan with an interest rate that’s lower than the ones you’re paying now.
2) Spreading your repayments over a longer period, so that each payment is lower. You may pay more interest in total this way, but each individual payment will be more manageable.
In an ideal world, the consolidation loan you take out will work on both fronts, having an affordable rate and a long repayment term to really drive your monthly payments down. Before signing up for a loan, do the math and make sure the figures work out and leave you a repayment level you can afford.
The Two Biggest Consolidation Mistakes
However, even if you manage to arrange lower repayments and relieve the financial pressure, there are still two ways in which consolidation can go badly wrong.
First, large consolidation loans are often secured on your home, meaning if you get into trouble with your repayments you could face foreclosure. You should think very carefully before turning unsecured debt like credit cards into a debt that could cost you your home.
Having unsecured lenders chasing you for repayment is stressful, but it’s nowhere near as bad as risking homelessness, so be 100% sure you can afford the repayments on any secured consolidation loan.
Second, when you use a consolidation loan to clear your credit cards and other debts, it can feel like your slate has been wiped clean. There can be a massive temptation to spend on your newly freed-up credit cards, but this is a sure route to disaster.
Debt consolidation doesn’t wipe out any debt, only restructure it to make it more affordable. If you continue spending on your cards, you’ll be building up new problem debt to go alongside your consolidation loan. If you couldn’t cope with your repayments previously, new debt will only make things more difficult. To avoid this, make sure you close down most or all of your credit card accounts and other ways of borrowing, removing as much temptation as possible.
If you avoid these two problems, consolidation can indeed make your debt problems easier to handle. However, don’t think of it as a silver bullet: If you don’t approach it with care, consolidation can cause as many problems as it solves.