Bad Debts and Good Loans - Can Debt Consolidation Work ...

Debt consolidation loans are one of the oldest methods used by those facing mounting difficulties with debt.? They?ve been joined in more recent times by debt management plans and a range of alternative solutions that can help you to regain control of your finances.? However, most experts will tend to warn against debt consolidation, as the most appropriate solution to money worries.? Debt consolidation is a fairly simple concept to understand and although it should come with a health warning for many people who are struggling with debt, it?s not all bad!? The term is simply used to describe the process of taking out one large loan to cover a total debt owed to a range of creditors.? The idea being that you clear all of your existing debts (although you don?t reduce the total amount owed) and take advantage of a lower rate of interest, allowing you to manage the debt more effectively.

Credit Cards ? Rest In Peace

The biggest reason that most experts will caution against a debt consolidation loan is not because they are actually?bad.??In general, the problem tends to be that those taking out one loan to cover all of their loans sometimes (completely innocently and inadvertently) forget to destroy their credit cards in a humane manner.? When an emergency pops up, it is all too easy to then re-use the recently paid off credit card, thereby increasing your debt.? What may seem like an emergency (and a small amount) can soon add up and, before we know it, the Debenham?s sale is classed as an emergency.? OK, so I?m being a bit flippant, but this is basically what underlies the cautionary tales around debt consolidation loans; it is all too easy to retain your credit cards and it?s terrifyingly easy to start using them again.? If you choose a debt consolidation loan to manage your debts it?s usually best to close all the accounts once you have paid them off.? One small health warning here, your bank and card providers will be unwilling to let you go and may put up a sugar-coated fight in an attempt to retain your custom.? If you do need to keep a card just for emergencies, ask your bank to cut your limit and, when they sneakily put it up again, tell them to cut it back down!

Calculated Benefits

The most useful part of taking out a debt consolidation loan is the simple fact that you?ll be able to benefit from a lower interest rate.? This means more of your monthly payment goes towards clearing your debt and less evaporates in the form of costs and charges.? Finding the right consolidation loan means finding the right interest rate and, as with all things financial, you should shop around.? It?s also important to establish your actual average interest rate on your current loans before you go compare.? This will be a combination of different rates on different types of credit.? A credit card will have a higher rate than a bank loan, while a store card will have yet another rate.? If you have a lot of smaller debts, from different providers, the variation could be pretty wide so add the different interest rates together to work out your average rate.? Once you have established this then start searching for consolidation loans with a rate that is lower, or at least matches, this figure; one slight word of warning here, if you have a large debt on a high interest account and a small debt on a very low interest rate, your average figure may be misleading.? As an example, Jack has a ?200 overdraft at 4% and also has just maxed out his credit card to its ?5,000 limit, on which he pays 20% interest; Jack?s average interest rate would be 12%.? Each year he will pay ?1,000 on the credit card and 8% on the overdraft.? In total Jack is paying ?1008 for his credit and his average interest rate is 12%.? A consolidation loan at 15% would leave him paying ?780 a year, despite the fact that the 15% figure is higher than both his average rate of interest, and his overdraft loan.? The rule is to examine what debts are where, and focus on consolidating the most expensive debts into a better rate loan.

Advice and Information

Debt consolidation loans are not for everybody and before using them as a way to manage debt it is important to take independent financial advice.? A range of charities will be able to offer help and advice ? including advice on budgeting and changing your methods of dealing with debt.? For those who want to manage their debt in a downwards direction a debt consolidation loan can be a great way to achieve this.? However, if you are struggling each month to keep up with existing repayments, debt consolidation may not be the best or only way to regain control of your finances.? Taking the decision to deal with your debt is a positive decision, but be sure to plan your strategy carefully.

Bob is a freelance writer who specialises in small business, personal finance and micro-loans, including?debt consolidation?strategies.

Source: http://www.freedomfromdebt.eu/bad-debts-and-good-loans-can-debt-consolidation-work

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