For many of us, getting into debt is
gradual. First, you buy a new car, or maybe just really nice Christmas presents
for everyone for a change. An out of pocket expense looks a lot more expensive
if you are paying cash; but if you can get by for the low, low payment of $30 a
month you probably figure that´s not a big deal. You know you´re responsible
and besides, you have a good job. Or maybe you need something big and the
store gives you a no interest loan to cover the cost of the item. Then you
get all these credit card offers in the mail and some of them are really compelling.
Pretty soon you find yourself with a half dozen credit cards–each carrying a balance–plus
an account at the furniture store and a department store or two. It´s manageable
because you are still making the monthly payments plus some. It´s cool.
Then, inevitably, something really big needs to be replaced. Or maybe the
bonus you expected is half what you planned. Or there is a medical emergency
for which you have out of pocket expenses and a deductible. Suddenly, you
find yourself stretching to meet your minimum monthly payments. You might
get caught in the trap of borrowing from Peter to pay Paul — borrowing cash from
one credit card to make the payments on another. And deep down, you know you´re
in trouble.
One solution you might consider is
debt consolidation. The question is: Will it really solve your
financial problems?
Advantages
Making and sticking to a budget is always a challenge. A
debt consolidation loan can make handling your payments more manageable.
It can provide the means to develop a workable budget, so you can get control
of you finances.
Owing money is hugely stressful, especially when you know you are too close to the
edge to be comfortable. You´ll only owe one lender — not a dozen — and that
alone can reduce the stress of meeting and paying multiple
debts. If you are carrying a variety of debts and not paying your creditors
off in full every month, then you are also paying finance charges, which can run
from low rates of 6% to a high of 18-21%. If you are carrying interest-free
debt with a final deadline for full payment but miss the deadline, you are then
liable for substantial interest changes that are retroactive to the date the loan
was originated.
A debt consolidation or home
equity loan can significantly reduce some of the high interest rates. With
the home equity loan the interest is generally tax deductible.
A debt consolidation loan may
allow you to extend the term of the loan. Instead of paying the loan off in
six months, a term of a year or 18 months allows you to reduce total monthly payments.
Instead of struggling under a half dozen large payments, you´ll often be able to
make a monthly payment that is considerably less.
And you´ll have only one payment to make. That translates into convenience.
If you've ever forgotten to mail a bill, you've seen the penalties that accrue even
if the payment is only a day late. A single payment reduces the risk that
you'll forget. Late payments also affect your credit rating, so avoiding them
is always a Good Thing.
Get a plan
If you choose debt consolidation
as an option for getting control of your finances, make a concurrent commitment
to yourself to accrue NO new debt. Make your budget, plan your expenses, then
stick to the budget.
If you don´t like budgeting per se, then at least track your spending. Log
every expenditure and watch where the money goes. If you start getting receipts
for every double mocha cappuccino soy latté and tally them up at the end of each
pay period, you may find that your coffee habit is costing you big time. When
that´s the case, look for ways to minimize costs. There are dozens of books
and magazine articles that have tips and pointers for saving money. It doesn´t
necessarily mean you have to start washing your used Zip-Loc baggies (though it´s
not a bad idea).
When you borrow, you compromise your future earnings. You´ll be paying off
goods and services consumed weeks and months ago, but will be committed to the lender
to make good on your obligation. And face it — the only reason for lending
money to anyone at any rate is to make money. Banks and department stores
know that the odds are in their favor and over time they will make a lot more money
by encouraging you to spend now, pay later.
Using a debt consolidation loan
as a tool, you can take back the power over where your money goes and when, set
up a savings plan, and make a plan to build a secure financial future for yourself
and your family.