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 seem 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 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 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
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.
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. The temptation to do so will be great. You might forget that you still have a $10,000 debt to repay.
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 one, arrange to have the credit limit lowered to a level you are sure you can pay.
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. Debt consolidation loans won’t provide a solution in themselves, you need will power and discipline.
Article by Richard Greenwood of compareyourbank.com.au which allows consumers to compare personal loans online.
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Tags: credit card debt, credit cards, debt consolidation loans