4 Tips for Effective Debt Consolidation

Did you know that people who take debt consolidation loans to pay off credit card debts actually end up with even more debt at year end? Did you know that it is one of the top reasons for the increasing stress levels in people nowadays? That is true as well, since people who take such loans remain with more stress than before taking them. 

However, some people do have the good sense and a bit of luck to turn around their situation for good after taking debt consolidation loans. For instance, there are many examples of people learning from their mistakes and dumping their credit cards to avoid falling into debt again and again. Credit cards are of course useful, and doubly so when you can use them to get loans at 0% interest. However, things do not always go your way, and one credit card debt can be devastating.

Cons of Consolidation Loans

There have been way too many cases of people taking consolidation loans to take care of their credit card debt, only to fall deeper into debt trap by the end of the year. Many “manage” to double what debt they had previously. It is rightly called a Debt Trap because you end up with a huge debt but with no providers due to your low credit score. And how do you end up with a low credit score? By being continuously unable to repay your loans.

The second form of risk from consolidation loans come from the type of loans you use. In the case of unsecured personal loans, the rate may be lower or higher. It can range from 3% to 36%, and depends on your credit score and on the lender. It depends on your debt-to-income ratio too. If you have a good credit score, you can get a lower interest rate, but with a high debt level, the amount you can borrow can be limited.

The third way to consolidate your debt is by taking a secured loan. These have lower interest rates but the risk of losing your collateral is still there.

The fourth way to get a consolidation loan is by drawing money from your retirement account. It is risky as well since the balance can be penalized and taxed as withdrawal if you can’t repay the loan.

4 steps of doing debt consolidation the right way

1. Assess your situation objectively: You know you need to see a credit counselor and bankruptcy attorney if your medical bills and debt repayments take up more than half of your income. It is unlikely that you can pay off the debt within 5 years. However, you are likely to qualify for faster filing which can enable you to erase consumer debt within 3 to 4 months.

2.  Try not to take high-cost loans: Thinking about taking a loan? Think about these things first: the amount of monthly payments, the number of payments and other fees to be given. Then compare that with what you are paying now.

3. Choose the shortest possible loan term: To ensure that you pay the minimum interest, keep the loan to 3 years, and 5 years maximum.

4. Close off your cards: Perhaps the best way to get out of debt and stay out of it is to throw off your credit cards. This may cost you a bit, but at least you won’t be in debt anymore.

Use these 4 tips, and debt consolidation won’t be a problem for you.