The Risks 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.
Debt consolidation loans may appear to provide a quick way to replace several outstanding debts – store and credit card debts, car and home loans, etc. – with a single payment on an easy schedule. But keep in mind that there are risks involved in taking out debt consolidation loans. You are actually changing short term credit card debts into longer ones.
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 instance you can access some of the equity you hold in your home at a lower interest rate than your existing debts and use that to pay off high interest credit cards. 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
If you will only be paying the minimum amount on debt consolidation loans, the total interest you will pay over the life of the loan dramatically increases. Getting the loan itself is not cheap as there are application fees and other charges that lenders will levy on debt consolidation loans.
Be very careful when choosing the option of consolidating your debts through home loans. Putting your home at risk would be terrible to you need to keep on top of the required payments.
You need to realize that your spending habits got you into this trouble and history will repeat itself unless you change. 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. The temptation to do so will be great. 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. Do away with all but one of your credit cards once they are paid off so you can’t get so far back into debt. 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.
Sit down and plot out your monthly income and all your outgoings with special note on where your outgoings are being spent. You need to cut the fat from your budget, doing away with expenses that are not required and refocus that money on making loan repayments above and beyond the minimum balance required. 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.
