Fiscal Responsibility a Must if You Choose the Consolidating Debts Option

Fiscal Responsibility a Must if You Choose the Consolidating Debts Option

Consolidating debts is not the right solution for everyone dealing with creditors. So before you meet with a debt counsellor to go over your current financial situation, it is important to understand the ins and outs of debt consolidation. Basically, consolidation requires that you get a loan, secured by collateral such as a house or property, so that you can restructure all your unsecured debt into one lower monthly payment. Typically, the new loan is at a lower interest rate than what you are currently paying.

Advantages

If you have sufficient equity in the home or property being used as collateral for a new loan, you can easily secure a lower interest rate to pay back debt. The good news is that you pay your creditor back with your loan so you do not have to field any more annoying or harassing calls the result is a lower stress level because you no longer dread the phone ringing. In addition, instead of juggling multiple creditors, you are only paying one your consolidation loan.

Typically, when consolidating debts by employing a loan, your rates are lower because they are spread over a longer period of time. As long as you pay in a timely manner each month, this is a great way to rebuild your credit too.

Disadvantages

One of the biggest disadvantages of a consolidation is the risk of losing your home or property. It is all too easy to start using your credit cards again or slip back into unsecured debt. You ultimately jeopardize everything you are trying to keep if you are not fiscally responsible and refrain from adding new debt to your monthly budget.

You may not always be able to include all your unsecured debt in the consolidation. This means that not only are you paying on a loan you have secured with your home or other property but you are still paying a high interest rate on the debt not included in the consolidation. What is the point in that? In addition, you may be tempted to agree to a slightly higher interest rate for your loan so you can borrow a little more money than you really need to pay off creditors.

Debt consolidation can be a great choice if you have plenty of disposable income or you have badly structured debt. It is all too easy to slip back into a creditor's trap with a loan. You have to stick to a budget and not incur new debt in order for a loan to truly be beneficial to you. Consolidating debts can be a good strategic move as long as you have a solid financial plan in place and understand the risks.

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