Debt Consolidation

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To consolidate debt means to take out a bigger loan in order to pay off several smaller debts. Generally speaking, people consolidate their debt for one or more of the following reasons:

1) They are able to get the new loan at a more favorable interest rate.
2) They want to only pay one monthly installment.
3) They are battling with the level of the current repayments.

Secured or Unsecured?

The new debt will either be secured or unsecured – depending on the amount concerned and how good the credit rating of the applicant is.

The Advantages of a Secured Loan

Wherever possible, a secured loan is a better bet – with full security, lenders are more willing to increase the amount offered as a loan. You also do not have to jump through quite as many hoops when it comes to getting these loans. Furthermore, the risk is reduced because of the collateral and you benefit from a lower interest rate. The problem however is the collateral as many people put up and thus their homes.

The Disadvantages of a Secured Loan

Of course, it is not all sunshine and roses when it comes to getting a secured loan. There is also the danger that you will end up paying a lot more interest over the long term than with traditional credit methods despite the lower interest rate because you are paying off your debt over a much longer period of time. This is unavoidable when you can not afford to pay your current debts however bankruptcy may be an option. Need a bankruptcy lawyer? Click here.

The Advantages of an Unsecured Loan

Generally speaking, there are fewer charges due in this case. It also gives those who have no fixed property or other forms of security a chance to also benefit from this form of security.

The Disadvantages of an Unsecured Loan

The rates offered are usually higher than those of a fully secured loan. You may also find that you are not able to borrow as much money – lenders are not willing to risk as much when it comes to unsecured financing. The lending criteria in these cases are higher than they would otherwise have been.

Is Debt Consolidation for me?

Perhaps you are feeling the pinch financially these days and, as a result, are considering debt consolidation. Debt consolidation, if approached properly, can be a lifesaver, if not, it can become a real nightmare. As long as you properly understand the implications of consolidating your debt, you could be a good candidate. Here are some questions that you need to ask yourself before embarking on any program:

What are My Reasons for Doing This?

Do you need to get yourself out of a financial bind or do you want to free up some cash to be able to spend it? Whilst this kind of loan can be a good way to help you get a handle on your finances again, they should be looked at as an emergency measure only and you are going to need to change the way you look at how you spend your money in future.

If you carry on spending as you did, you will find that all you have accomplished is to dig yourself even deeper into debt and may even find yourself sinking.

Am I Disciplined Enough?

There are two basic options when it comes to repaying this kind of financing – paying only the required installment or paying in additional amounts. For this kind of financing to really work in your favour, you need to opt for the latter option. You should be aiming to repay the same total amount in terms of an installment to service your debt as you did before you consolidated them.

What this means in a nutshell is that you will aim to repay the new loan over the same short term as your previous loans would have been repaid or you will pay a great deal more interest and will be worse off in the long run.

Now, in theory, this idea makes perfect sense, and most people agree that it is the best option. The problem is that you need to be disciplined enough to pay the “extra” money into the loan – it can be extremely tempting to just repay your basic installment every month and to vow to catch it up later.

Am I Willing to Close my Cards?

If you get this loan, what will you do with your credit and store cards? Keeping them can be tempting and you will probably have the best intentions when it comes to these cards. What most people do, however, is to consolidate the debt and then max out their credit facilities again and the debt spirals out of control again. You need to close off as many store and credit cards as you are able to break the debt cycle. Choose a maximum of one credit card and one store card to keep in the event of emergencies and use only if necessary.

If you can answer these questions positively and can be sure that you will manage the new loan smartly, then this is the kind of financing for you. It can be a marvelous tool in securing your financial future so make sure that you know what you are letting yourself in for. Then all that is needed is to partner with the right organization.

Tips for Debt Consolidation

When it comes to the actual consolidation itself, it does pay you to look around at the options available. Interest rates and lending fees vary from one lender to the next so it is wise to look into a few different companies and compare what they offer.

It is important also to find a company that is more flexible in terms of repaying the loan before the term expires – some companies will charge penalties for early settlement of debt.

Find out what the basic lending criteria are upfront from each institution. Does it help to offer additional security when it comes to negotiating your interest rate?

It will also pay you to find out what your current credit rating is. Whilst you may still be able to get a secured loan even if you have a lower credit score, you will pay a lot more in terms of interest for this privilege. If you have bad credit, and are able to wait a bit to consolidate your debt, it will pay you to work on cleaning up your credit before applying. (This will usually take a few months.)

Debt consolidation is a clever financial tool and can be made to work in your favour. Make sure that you are fully committed to attaining financial freedom and you can use this sort of financing to get a firm grasp on your debt and to get out of the grip of high-interest credit cards. Always remember however; bankruptcy may be an option. Need a bankruptcy lawyer? Click here.

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