What Are The Benefits Of Debt Consolidation?

Have you ever thought about a debt consolidation loan

? Debt consolidation involves obtaining a loan to pay off your other loans. Very often debtors will use the debt consolidation loan to pay off several other high-interest debts.

The problem is that sometimes people simply allow their debts to grow back again. And usually a debt consolidation loan is not an option the second time around. You must adjust your thinking before getting involved in borrowing money to pay off money you previously borrowed. You can end up in a vicious trap.For example, some people are seduced by offers of reduced-interest credit cards, thinking they can save money on interest that way. Comparing the high interest rate with the new lower interest rate, you seem to be saving money. Trouble is that these low interest-rate offers only last a short time, and then they go to higher rates, and the savings is lost. The only way to continue the savings is to transfer the balance again; and that can hurt your credit rating.

Here's what to do first: get a loan from bank or credit union, and use the money from the loan to pay off your other obligations. You ought to make sure the amount of the loan is sufficient to pay off your other debts. Be sure that the consolidation loan has a lower interest rate than the high-interest loans that you're paying off. That should make your payments smaller. On top of that, the length of the loan is usually longer than the repayment schedule for your original debts, thus lowering your monthly payment again.You will probably incur some cost in obtaining a debt consolidation loan. And often the person who needs the debt consolidation loan is in the worst position to get the loan he or she needs. And getting a new loan can be very difficult and expensive.

A way to make use of a consolidation loan is to use the reduction in monthly payments to pay off your debt more quickly. If you make sure you borrow at a lower rate of interest and repay the loan over a longer period of time, you could find that you have extra money every month. You must change your thinking at this point. Be extra sure to use that surplus money to make larger payments on your consolidation loan. That way you save even more money by reducing the amount of interest you pay. When you apply for the loan, make sure you are allowed to make extra payments on the principal.

One of the problems with debt consolidation is that you can be prevented from discharging your debts in bankruptcy if you take out a loan. The bankruptcy laws prevent debtors from discharging recent loans, and if the loan is secured against your real property (your house), you can't discharge that debt unless you forfeit your house.

by: Bruce Adam

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