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 lines of credit may appear to provide an easy solution to replace several financial obligations – 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 way, you have better chances of convincing your lender to provide the debt consolidation loans you need.
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 Caveats
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.
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 the reduced interest burden. But you now have three credit cards with available credit limits you can access in full. The temptation to do so will be great. 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. 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 one, arrange to have the credit limit lowered to a level you are sure you can pay.
Sit down and plot out your monthly income and all your outgoings with special note on where your outgoings are being spent. 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 compare credit cards online.