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Is Debt Consolidation Worth the Risk?

Debt consolidation rolls high-interest debts into a single lower-interest payment, such as credit card bills. It can reduce your total debt and restructure it so that you pay it more quickly. If you have a manageable debt amount and simply want to reorganize several bills with various interest rates, payments and due dates are a sound approach to debt consolidation that you can deal with yourself.

You have credit cards, student loans and auto loans in depth. Minimum monthly payments don’t help you solve your debt. Something has to change, and you are considering debt consolidation because the one easy payment and lower interest rates they offer are promising.

Some people decide that they have had enough to manage multiple payments on a monthly basis and choose to consolidate with a personal loan, a credit card or a debt consolidation firm. But the truth is that debt consolidation loans, and debt settlement companies do not help you to kill massive debt amounts. Actually, due to so-called consolidation, you pay more and remain in debt longer.

Then you can ask yourself now, is Debt Consolidation worth it? Whether a loan for debt consolidation is worth depends mostly on your personal situation. In short, this is a loan that helps you to repay all the lenders to whom you owe money to wipe out your debt. But as helpful as they can be, they’re not everyone’s right.

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When does Debt Consolidation really Helpful?

Based on the financebuzz there are signs that we should get our attention to, so that debt consolidation really helps you and it is worth the risk to decide for.

You reduce the cost of repaying your loan. If you can reduce both your monthly payment and the total interest paid over the life of the loan, it can be a good idea to consolidate loans. If you can qualify for a loan for debt consolidation at a lower interest rate, you usually have to take the loan out. However, you will also have to consider the impact of the repayment schedule, as the time to repay your loan affects both monthly payments and total repayment costs.

You are struggling to repay your debt. Consolidation loans are also worth it if they save you from collecting debts that you can not repay. Sometimes the monthly payments on your debt are too much for you— maybe because you have a loan with a short payment timeline or because you owe many lenders and the minimum payments required by each lender add up to more than you can.

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The majority of debts you have are either a fixed rate loan or a variable rate loan. A fixed-rate loan has the same interest rate when you pay the debt back. Since the interest rate never changes, you never change your monthly fee. You will be aware of the exact amount of your monthly payment in advance until the debt is paid out so that you can plan your budget.

Success with a strategy for consolidation requires the following: Your total debt does not exceed 50 percent of your income. Your credit is good enough for a credit card or a loan with low interest rates. Your cash flow regularly covers your debt payments. You have a plan to prevent debt from running again.

Consolidation shows a light at the end of the tunnel for many people. If you take a three-year loan, you know that it will be paid in three years–assuming you pay on time and manage your expenses. Conversely, minimum credit card payments could mean months or years.

Better Watch Out

In every plan or techniques to get rid of your debt, we can’t deny that there are loopholes, and so does in debt consolidation, so better to be careful to fall on those ploys, so here’s how you can discern those pitfalls based by the author Dave Ramsey.

There’s no guarantee that when you consolidate your interest rate will be lower. The interest rate of the debt consolidation loan is usually determined at the discretion of the lender or creditor and depends on your past payment and credit score. Even if you qualify for a low-interest loan, there is no guarantee that the rate will remain low. However, let’s be honest: the main problem is not your interest rate. Your habits of spending are the problem.

Lower interest rates on loans for debt consolidation may vary. This applies in particular to the consolidation of debt through the transfer of credit card balance. The attractively low-interest rate is usually an initial promotion and is only valid for a certain period of time. The rate will increase over time.

Consolidating your bills could mean that you’re in debt longer. You will have lower payments in almost every case because the term of your loan is extended. Extended terms signify increased payments. Your objective should be to get out of debt as quickly as you can.

Consolidation of debt does not mean the abolition of debt. You only restructure your debt, not cancel it. You don’t need debt repair, you need debt repayment.

Perhaps, your money behavior will not change. Most of the time, after someone has consolidated its debt, the debt increases. Why? You don’t have a cash game plan and spend less. In other words, they have not set up good money habits for debt relief and wealth building. Their behavior has not changed, so they are very likely to return to debt.

Takeaway

If you owe money on credit cards or have other high-interest debt, it is often worth dramatically lowering your rate with a consolidation loan. Just make sure you shop carefully for a lender who offers reasonable terms and makes sure that the loan you end up with costs you less so that it is easier to pay back and you can reach your goal of getting out of debt with fewer obstacles.

One error many people make when they use debt consolidation is that they no longer use credit to pay for things. If you are not prepared to stop using credit, a consolidation loan will probably lead to more debt because you have zero credit card balances.

Therefore, if you consider a consolidation loan, make sure that you use credit cards to finance expenses and that you are committed to cutting your credit cards and living within your means.

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