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Monday, January 22, 2018

Important Considerations in Deciding Whether Debt Consolidation Will Help To Eliminate Debt


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Among the many suggestions for getting rid of debt is debt consolidation. Many people think that aggregating all outstanding debts into one makes debt management easier. You can lower the interest rate as well as monthly payments by structuring the loan appropriately. However, there are quite a few things to consider before embarking upon a plan to consolidate your debt and make life easier.


Debt Consolidation Fundamentals

With a debt consolidation loan, you can pay off all the dues on your credit cards as well as other retail loans that you might have taken earlier and are finding it difficult to manage and stay afloat. Essentially, while the total amount of the debt does not get reduced, you are left with one only loan to repay in monthly installments for an agreed upon period. This can be a major relief to those who are disorganized and end up missing payments on one or the other loan every month.


Affordability Can Come At a Cost

The lowering of the interest rate as compared to the rates you were paying on the credit card dues will come as a welcome relief to those struggling to make the monthly payments. However, it may happen that even the new monthly payment may be stretching your budget thin. When you take a debt consolidation loan, you can structure the loan according to your convenience and opt for a longer period for the loan repayment for effective debt relief. While this will bring down the monthly payments, you will end up paying more interest over the full term. Extending the loan is not a good strategy for saving money so you should attempt to pay off the loan in the shortest possible time.



Think Before You Convert Unsecured Loans to Secured Debts

You can get a debt consolidation loan that is secured by a second mortgage on your home or even by accessing a home equity line, but it is more common for people to take the loan without offering any security. While by doing this, you do not endanger your assets, it should be appreciated that unsecured loans carry interest rates that are high, though lower than the typical credit card. As usual, it is a tradeoff between risk and return. If you convert your unsecured debt into a secured consolidation loan, you can save substantially on the interest but you need to be aware that you are putting your assets on the line and if you default you will lose them.


Conclusion

Many people undertake debt consolidation only to rack up further balances on their credit cards within just two to three years. You need to keep in mind that consolidating debt is just a solution to a specific situation, and unless you stop spending more than what you earn, you will continue to get bogged down in debt. The only way is to maintain strict financial discipline and live within your means and save the maximum possible to wind down your debt as fast as possible.

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