Debt consolidation Loans: Read Before Your Apply
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 lines of credit may appear to provide a quick way 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 simply converting several short term credit cards debts into one longer one.
Your Options
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. You’ll need to present a well-prepared budget and a realistic schedule of repayment. 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 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
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.
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. 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. 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.
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. 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 credit cards online.
