Use Your Debt Consolidation Loan Wisely |
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A debt
consolidation loan is a very helpful tool to eliminate your debts but if you do not discipline yourself after taking this loan, and max out your credit cards again, you will land yourself in a bigger financial mess If you have many debts and the debt repayments are like a mountain on your head, you could take resort to a debt consolidation loan to find a solution to your problems. This loan will consolidate all your smaller loans into a single loan and will bring your monthly payments down and cut the interest you are being charged. This debt consolidation loan can also be used to pay store/credit card bills, clear other bills and repay personal loans, most of which are high-interest debts. A debt consolidation loan is normally a secured loan but it could also be unsecured (without collateral), in which case it is a personal loan and carries a much higher interest rate. With a secured loan, your home will be put up as collateral, effectively for a second mortgage. As the stakes in both cases are too high, you have to make sure beforehand that you can make repayments on schedule. You stand to lose your home if you fail to pay a secured debt consolidation loan and if you default on an unsecured debt consolidation loan, your credit situation will worsen further and it will be very difficult for you to borrow money in the future. A debt consolidation loan is basically taking on one debt to pay off various debts, but the fact remains that debt is still there. The only way to reduce your debt is by frugal spending and disciplining yourself to curb your spending instincts. As such, merely repaying your current debts through a debt consolidation loan will serve no purpose unless you tackle the fundamental problem of reckless spending and stop using store/credit cards. You must remember that your current situation where you have to take the help of a debt consolidation loan has arisen only because of your wayward spending sprees, landing you in this financial mess. If you do not address this basic problem of living beyond your means and improve your spending habits, you will find that taking on a debt consolidation loan will further worsen your situation. Typically this situation develops as follows: You are a reckless spender and are using your credit cards to give vent to your spending sprees. As a result, you have built up a considerable amount of debt and a debt consolidation loan will seem like an oasis in the desert with which you feel that you have paid up all your loans. However, if your spending habits continue unabated, you will find that in another year or two you would have run your credit cards up to the same levels or higher than they were before the debt consolidation loan. This situation is further fueled by the fact that when all your credit card debts have been paid off following a debt consolidation loan, you suddenly have new spending power: empty credit cards. With your reckless spending habits the cards will max out once again and you will have both the loan and credit cards to repay. You will have no surplus funds even for life's necessities. The moral of this story is that you should not use the credit cards after you get a debt consolidation loan, even if you've cleared your balances. You should also remember that although a debt consolidation loan may reduce the number, or amount of your total monthly debt payments, depending on the interest rate and total number of payments, the debt consolidation loan may actually result in more total interest that you pay. The best thing to do is to leave your credit cards alone at this stage. You must ask yourself whether you will be able to pay back the debt consolidation loan even if you suffer setbacks like job loss or ill health, before you apply for such a loan. This loan can work very well and help you become debt free only if you are confident of repaying your dues and rectifying your mistakes. |
