Avoiding The Dangers of Debt Consolidation Loans
You may have seen it on television and heard it on radio — people who are out of money have rolled all their debts, including credit card debts, into one, have gotten interest payments reduced, and apparently have restored some order into their finances. The loans designed to help in these situations are known as debt consolidation loans and can help you regain control of your debts.
Credit card debt consolidation loans may seem to make it quick and easy to wipe out your existing credit card and personal loans debts and get in control of your spending. But keep in mind that there are risks involved in taking out debt consolidation loans. You are simply converting several short term credit cards debts into one longer one.
Your Consolidation Choices
You have two options in getting debt consolidation loans: personal loans and home loans. If you are keen on personal loans, you may want to explore possibilities with your existing lender first. A thorough househoild budget and repayment plan may be required. This should boost your chances of getting the loans you need from your lender.
If you have built up sufficient equity in your home, you may want to choose the home loan option. In this case, you can arrange to convert some of the excess equity to cash to help you pay your higher-interest credit card debts. By tapping your home equity, you gain a longer period within which to pay off other debts — if need be, for a term as long as your home loan. The result: lower monthly repayments and an easier cash flow.
The Risks
You can massively reduce the total amount of interest yoy pay by paying above the minimum repayments each month. Getting the loan itself is not cheap as there are application fees and other charges that lenders will levy on debt consolidation loans.
If you are not financially secure then you could be putting yourself at further risk using your home equity. Putting your home at risk would be terrible to you need to keep on top of the required payments.
It is extremely important to realise one thing: your spending behaviour is your most dangerous adversary. For example, debt consolidation loans might allow you to pay off credit card debt on three credit cards amounting to $10,000 — which helps you because of a reduction in the monthly interest charges. But you now have three credit cards with available credit limits you can access in full. It’s very easy to be tempted. You might forget that you still have a $10,000 debt to repay.
Don’t get yourself into a debt consolidation loan unless you are serious about changing your spending habits by paying off your debts and avoiding new debts. A good way to minimise the temptation to use your credit card will be to cancel all but one of the cards. For the remaining card choose the one with the lowest interest rates and fees and ask the issuer to lower the limit to a level you can pay off in full each month.
Take stock and create a budget plan that takes into account all your monthly income and outgoings. The objective should be to cut discretionary expenses down to the minimum and to use the available cash for loan repayments. Debt consolidation loans won’t provide a solution in themselves, you need will power and discipline.
Article by Richard Greenwood from click4credit.com.au which allows consumers to find the best credit card deals online.
Tags: credit card debt, credit cards, debt consolidation loans