Is Debt Consolidation a Solution to Debt Reduction?
Many financial experts suggest consolidation of debts as the solution to reduce your debt and become more financially secure. But is this true? Debt consolidation can lower your monthly payments and help you better organize them. But consolidating debt may not be the best solution for everyone. Some things you should keep in mind before going for debt consolidation as a solution are discussed here.
Taking out another loan can be risky
If you are taking a second loan against your home to consolidate your debt, you put your property at risk and may even lose it in the event of a default. There is the possibility that you might consolidate your entire loan amount only to realize that you are unable to pay back the loan, making your financial condition murkier.
A proper financial planning is required
If you are a spendthrift or have trouble sticking to your monthly repayment schedule, debt consolidation may not be the best choice for you. Proper financial planning is necessary to cut down your expenses. You can reduce your monthly expenses and route the money towards paying the loan. If you still have missed payments or cannot stick to the repayment schedule, then you are in for big trouble. You will then have to hire a financial advisor who will chart out a plan to help you fix your debt problems.
Assess the benefits of debt consolidation carefully
If you have decided to avail a debt consolidation loan, make sure to analyze the pros and cons associated with such loans. Remember that lenders charge money to close previous loans. You’ll also have to pay charges for obtaining the debt consolidated loan. Make sure that you do not end up getting a high interest rate loan- this will only add to your troubles. It is advisable to seek help from a financial advisor before you take such a loan.
So, after consolidating your debt, it is advisable not to abuse your credit cards or take out any loans for a while unless absolutely necessary. If you are a homeowner, avoid using up all the equity in your home to access cash for frivolous purchases. Debt loads can make your future insecure and cause anxiety. The best way is to plan your finances properly and live more frugally, especially in the light of the current weak economy.