Posted by Art Of Legend India [dot] Com On 4:41 AM
Summary: Consolidated debt has its risks, but if you take steps to manage it responsibly, a consolidation loan can be a lifeline in a sea of debt.
There’s no shame in being in debt. Many of the supposedly rich and famous have had to claw their way out of debt. Nicolas Cage reportedly blew away his huge fortune on three castles, two islands, a dinosaur skull, a jet, two yachts and fifty sports cars, thereafter filing for bankruptcy in October 2009.
Anyone can fall into debt, but there’s always a way out. One of the most commonly sought out solutions is to consolidate your debt. However, you need to be very much aware of the risks involved.
A consolidation loan is a single loan wherein you place all your debt from various sources, and then only need to worry about one lump sum to pay off. This streamlines your repayments, frees up cash flow, and gives you more time to pay your debt off.
Firstly, you need to know that just because you’re paying lower interest rates and smaller sums, you won’t be paying less in the long run, because you’ll be making repayments over a longer time. Herein is the danger: because people end up paying less each month towards their debt, they might get into the trap of using that freed up cash to spend where they shouldn’t be, which is usually the reason for debt in the first place. Furthering your debt is a possibility if you don’t change the way you deal with money.
If you’re considering this route you need to make a plan, change your spending habits, and stick to it.
First make an informed decision about whether a consolidation loan suits your financial situation and repayment abilities. If you’re paying off high interest credit card debt, but only at the minimum rate, you’re going to be paying for a very long time. There is an amusing article in cracked.com that explains Why You Will Never Pay Off Your Credit Card. Calculate for how long you would be paying off your current debt, compared to a consolidated loan.
If you’ve decided a consolidated loan is for you, then read on.
Take the time out to find rates that suit you. Weigh up how much you’re comfortable paying off each month, with how long you want to take to get out of debt. Don’t simply go for the lowest repayment options. Remember, with the more you pay each month, not only will you get out of debt faster, but you’ll be less tempted to spend the extra cash unnecessarily, potentially getting back in to debt.
However, don’t be over eager in paying back as much as you can. There are unexpected occasions where you’ll need some extra cash, such as medical bills or car troubles, and then you don’t want to be in a situation where you’d have to spend on credit again.
However, if there aren’t unexpected expenses, don’t think you can just spend extra money on a cruise or a new sound system you don’t need. This is your chance to change your financial habits. Get debt counseling if you need to. Draw up a practical budget and stick to it.
Whatever you do, don’t miss repayments. Also, be sure to make your payments on time. Many don’t realize that even being late by one or two days can have a serious adverse effect on your credit ranking.
If managed correctly, a consolidation loan can be a lifeline in a sea of debt. Just be sure to be careful and responsible. Think of it as an opportunity to readdress your approach to your finances.