Debt consolidation is now considered as the most effective way of debt refinancing, which primarily entails availing a single big loan to pay off the multiple existing loans. This strategy is developed for the individuals who suffer high consumer debts. This is also sometimes applied as the state’s fiscal approach to government debts and corporate debts. Here, we will discuss about a few things you need to be aware of in terms of debt consolidation in order to avoid certain traps in it.
The first step in debt consolidation is to initiate the right action. If you are already into overwhelming debts, simply ignoring these will not make them go way, as many people tend to do. On the other hand, this approach will only make your problem worse overtime and finally put you into total chaos. Taking the right move of debt consolidation can be your first step into living a debt-free life in the long run.
Exploring the options
If you are thinking of getting relieved of your overwhelming debts by adopting a debt management plan, there can be various way outs such as:
- Debt consolidation loan
- Debt settlement
- Borrowing from the retirement funds
- Borrowing from the equities on your home
- Consolidating student loans
- Consolidating credit card payments etc
It is ideal to avail expert counseling that is offered by the credit counselors who can give you some inputs based on your current fiscal situation to take an adequate move.
Some debt consolidation traps to watch out for
When you hear it for the first time, you may find debt consolidation loans to be very reassuring with a lot of promises. You may get instantly attracted towards the reduced monthly payments, lower interest rates, and the comfort of a single monthly payment. However, you need to be aware of the fees involved, risks of incurring a greater debt, and the possibility of higher interest rates later. Some other such traps you need to be aware include the following.
- Diet pill without changing eating habits
The consolidation of debts doesn’t have an excellent track record when it comes to people who just exchange their loans, but don’t change their behavior. Consolidating the debts can be compared to losing weight with the help of a diet pill, but if you don’t stick to the diet and healthy eating habits, you may probably gain double the pounds back over a short span itself.
- Expensive consolidation services
Hiring a good debt consolidation company is crucial. Not every service provider will offer you additional benefits other than saving you from the debt trap. In fact, at least a few of them may do it for hefty fees, sometimes as an up-front payment or sometimes in terms of floating interest rates. So, it is very important to know the terms and conditions in details before entering into a contract with a debt consolidator.
Along with the above, you need to keep an eye on the marketing situations as well as the economic situations to identify whether going for debt consolidation is going to be an ideal option for you to move on.
Author bio: Robert Tailor is a leading trial attorney who also founded a personal finance blog, discussing about various mortgaging and financing options, debt management, debt consolidation, funds management etc.