Limitations of Debt Consolidation as a Debt Reduction Solution and Potential Pitfalls

Debt consolidation is glorified by many debt reduction companies as an easy solution that can relieve you of all your debt related problems

. Be wary of such claims, as consolidating debt, even though can reduce your monthly repayment amount by a little, but it can't clear your debts altogether. Besides, there are also several pitfalls of this solution that you should be aware of.

Do not Agree to any Balloon Payments towards the Consolidated Loan

Many a times you may feel that it is the best solution to your crisis. But the interest only payments are only a temporary relief. There's a very little chance that your financial situation will improve all of a sudden and the upcoming balloon payments will be a breeze for you. Since these debt consolidation loans are granted against your property, you will be risking your most valuable asset by doing so. A move to consolidate your debts can actually lead you to disaster in this case.

Only Disciplined Financial Planning can Bail You Out

If you are a type of person who cannot resist reckless spending, consolidating your debt won't help you resolve your debt woes. You need to get your finances in order and curtail your monthly expenses. Make sure you do not spend the money from your new loan on indulgent expenses - it would just be self destructive. This may eventually lead you to bankruptcy. Make a monthly budget and plan to spend wisely to keep your expenditure in check. If needed, you can even seek help from a debt counselor in doing this. Financial discipline is the only way to get out of your debt problems.

Carefully Evaluate the Financial Benefit of the Consolidated Loan

When you take out a consolidated loan, you need to assess if it is truly financially beneficial for you. Remember that you'll be incurring some closing costs on some of your current loans and may even pay fees and charges for the new loan. The net of all these loan expenses and benefit from the low interest rate on the new loan should be positive. If required, get a mortgage expert to walk you through the calculations to make sure that you are truly benefiting from consolidating your loans.

Meet Immediate Needs with the Excess Cash You Get from the Consolidated Loan

Do not invest the extra cash you get from the consolidated loan in things or projects that can wait. After paying off all your previous debts, the remaining money should be prudently allocated towards important and pressing needs. For example, home improvement and buying a new car can wait. First, get the mess around you in order.

Whatever your situation may be, after debt consolidation, do not give in to the temptation of availing additional funds through new loans or credit, unless it is a true emergency. If you want to have a secured future, which is not dogged by debt anxieties, then you need a mature approach towards your financial planning. Remember that it is easy spend but difficult to save. But the latter is more important than former for a secure future.

Limitations of Debt Consolidation as a Debt Reduction Solution and Potential Pitfalls

By: Jeff Livingston

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