How Debt Consolidation Can Ease Debt Problems

If you have overwhelming levels of debt, one way to handle the situation is by consolidating the money owed to several different lenders into one lump sum and then making regular payments towards this single account. Credit counselling agencies often advise consumers to consolidate their existing debts by taking a new low-interest loan and then using that money to repay their various higher-interest loans. Debt consolidation does seem to make sense.

The potential for interest expense reduction is one of the most important ways that debt consolidation can ease debt problems. With a debt consolidation loan, the principal amount of your debt will remain the same, but your interest expenses can drop dramatically. But if you are able to transfer balances from a high-interest credit card to a new credit card account with an introductory zero interest, your interest expenses will disappear altogether.

The other significant impact that debt consolidation can have in easing your debt problems is in the amount of your monthly payments. If you can arrange for a debt consolidation loan with a term of several years (say, five years), your monthly repayments on the new loan could turn out less than the total payments you have to make on your existing high interest debt. That means your monthly outgoings will be less than before, and you will have a little more money on your hands that you can put to wiser use.

There are small conveniences, too. Since you will have only one account, you will have fewer cheques to write each month or fewer trips to make. That should bring some relief, not least because you also save some money on the cost of cheques or of petrol. The individual amount s may be insignificant but they can all add up.

You will need to be careful with these loans, however, in order to ensure that debt consolidation can truly ease debt problems. It would be best if you can consolidate unsecured debt carrying high interest into an unsecured debt with lower interest. This is what would happen if you transferred balances from one credit card to another. You will get the savings on interest expense, but the reprieve you get would only be for the duration of the introductory period. In such cases, you may want to look for a credit card with a longer introductory zero-rate period.

Your other option would be a remortgage on your home. If there is an existing mortgage on your home, you may have to obtain a home owner loan, to access the capital that you have so far accumulated in your home. The interest rate may be higher than on your first mortgage but it should be lower than interest on unsecured credit card debt. If the interest is not lower than unsecured rates, there is no point in getting the loan: remember you are offering — and risking — your home to secure the loan.

Also be aware that the costs of obtaining a home owner loan may add up. There will be new arrangement costs to pay, and, if you are using a debt counsellor, you may have to pay some fees. In order to make sure debt consolidation can ease debt problems, make sure to obtain such a loan from a reputable financial institution, else you could end up paying more in fees and other charges than you would have if you pay off your debts by yourself.

Additionally, beware of the temptation to go out and charge some more when your debt consolidation loan has already taken you out of immediate danger. Debt consolidation can ease your debt problems but only if it teaches you to impose tighter control on your spending habits all the time, not only during the period of consolidation.