Debt consolidation Loans: What You Must Know Before Your Apply
Friday, June 12th, 2009 Subscribe To Our Feed
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 loan packages that make these possible are called debt consolidation loans and they do provide some manoeuvring room if your loans are no longer controllable, and you need to rein them in.
Debt consolidation loans may appear 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 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 want to go down the personal loan route then checking options with your current bank or lender may be the first port of call. 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 Caveats
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.
Don’t forget the risks involved with debt consolidation via your home loan. You would not want to lose your home, so make sure to stick very strictly to your repayment scheme.
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 the reduced interest burden. But you now have three credit cards with available credit limits you can access in full. It’s very easy to be tempted. With the debts cleared on your cards you could quickly forget you still have the $10,000 debt to pay off.
Debt consolidation loans are useful only if you resolve to clear this debt as quickly as you can and to avoid racking up more new credit card debt until everything has been paid off. 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.
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. Remember, self-discipline is the key to make debt consolidation loans work.
Article by Richard Greenwood of compareyourbank.com.au which allows consumers to compare personal loans online.
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