subject: Is Debt Consolidation Freedom Or Another Trap? [print this page] Before making the choice to get a debt consolidation loan, you need to know what debt consolidation is. What is debt consolidation? Debt consolidation involves taking out one loan to pay off higher interest-rate loans.
The way it works is you get a loan from bank, and you use that loan to pay off all your outstanding loans. Make sure that the consolidation loan has a lower interest rate than the credit card loans and other personal loans that you're paying off. That allows you to reduce your monthly payment. In addition, the length of the loan is often longer than for your original debts, thus lowering your monthly payment.What other alternatives might I have? If you want some other alternatives, there are a lot of good alternatives to manage and reduce your debt load.
Take a close look at your monthly budget with a view to reducing your debts. If you adopt a more back-to-basics lifestyle, you can put more money toward paying off your debt. An initial step is to stop borrowing money - especially on your credit cards. It can be tempting when your income is reduced to use credit cards to make up the difference. Don't do it! Cut up the credit cards; or at least put them out of sight. Credit card debt is the most expensive credit you have. If you continue to give in to the lure of your credit cards, the credit card companies will keep you in debt until you go bankrupt.
The best way to use a debt consolidation loan is to apply the reduction in monthly payments to pay off your debt. If you borrow at a lower interest rate and repay the loan over a longer period of time, you will probably find that you have extra money in your budget. You must change your thinking at this point. Be sure to use that surplus money to make advance payments on your consolidation loan. The extra payments will significantly reduce your debt. When applying for the loan, check with the bank officer to make sure you can make advance payments on the principal.
But a debt consolidation loan is not necessarily for everyone. You may incur some cost in obtaining a debt consolidation loan. And sometimes the person who needs the loan is in the worst position to get the very loan he needs. The person applying for the loan will likely have a poor credit rating score already. And getting a new loan can be very difficult and expensive. Debt consolidation loans often have "points," (a point is one percent of the loan), fees, title insurance, etc. The expense can be daunting.Consolidation loans have several benefits for many consumers. But you must use the loan wisely. Change the way you think about money; avoid getting further into debt.
