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4 Important Things to Consider Before You Consolidate Your Debts

Many people think that consolidating debts is a quick and easy way to solve their debt problems. It is easy and quick to get the loan and set it up, but there are still many dangers involved if they haven’t fully thought it through.

It happens all too often: John borrows $10,000 to consolidate his multiple credit card debts only to use his credit cards again when he feels the pinch. Before he knows it, John now has the $10k loan and a balance of $5k on his credit cards. He’s in more debt now than when he started.

To avoid this nasty debt cycle, you need to consider some important points before you make a decision. Here are the top 4 things you need assess:

  • Do you spend more than you earn? A common reason for using a consolidation loan is to help with cash flow. But just like a vitamin supplement that will only help if you have a good diet to begin with, a consolidation loan will only help if your budget is cash flow positive. The worst thing you can do is take out a loan and they use your credit cards again when you feel the pinch.
  • Can you afford the repayments? This comes after you consider your budget and based on that analysis, can you afford to repay the loan comfortably? The whole point of debt consolidation is to make the payment slighter lower and more affordable. If this isn’t the case, or you may struggle to meet the payments each month then you might need to look for another solution – like a debt management plan, for example.
  • How long will the loan last? Sometimes, consolidating your debts to a lower monthly amount means you will pay for longer. This might be a positive if it means you aren’t struggling every month, but you need to be aware that you will be in debt for longer whereas most people are trying to get out of debt as soon as possible.
  • How much will you repay in total? Another effect of paying the loan for longer is that the total repayment might be more than it would have been if you continued paying the previous amount. This might not be the case if you had high interest credit cards, and it gives you the more affordable repayment you might need, but you need to be aware that you might pay back more with a consolidation loan because it is taken over a longer period.

Hopefully these points will give you more information about whether a consolidation loan is right for your situation and you will know exactly what you’re signing up for.

They can be an excellent debt relief tool when used appropriately but many people think they are a magic bullet and get a nasty shock when they don’t change their spending habits or thinking and end up further in debt.

If you’ve taken out a consolidation loan in the past, share your experience with us in the comments below.

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Date:
May 24, 2012 um 3:58 pm
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Debt
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