With our consumer society and the pressures of modern living, debt is becoming an increasingly common problem. Even with the best will in the world, oftentimes people find that their income is less than their outgoings resulting in a seemingly unavoidable spiral into debt and as time goes on the debt just gets bigger.
Everyone has bills that must be paid – for instance rent or mortgage, car loan, electricity and telephone. The list seems endless. And then there are those unexpected bills if an appliance breaks down or if you have an accident. By the time these bills are paid, in the worst cases there is precious little or nothing left over for food and clothing. So what is to be done if the pressures on your purse are too high?
Debt consolidation is one way that might help. Simply put, debt consolidation means taking out a single loan to pay off your regular outgoings. The interest rate will be lower than the combined rate of your individual debts, certainly much lower than the rates associated with hire purchase and credit card debt, so your monthly payments will be reduced. This will leave you with extra money available. It will also be easier for you to budget, as you only have to manage one loan. This does not reduce your overall debt but it does mean that your life will be easier and less stressful as hopefully you will some extra cash in hand at the end of the month.
Of course, as with all schemes that look good, there are some catches. Your monthly payments are reduced but the period of repayment is extended. Generally this means that, in the long term, you end up paying more. For some, this is not acceptable but for many it is the best way to improve their day-to-day living.
Also there will be establishment fees and possibly other “hidden” charges. These may include late payment charges, default charges and charges to alter the terms of the loan agreement. It is even possible that you may be charged for paying off the loan early. Additionally, companies that specialize in debt consolidation sometimes charge interest at higher rates than your bank, so you should talk to your bank first. Before signing up to a debt consolidation loan make sure that you have examined the costs and risks in detail. It is a good idea to get advice from a budget adviser and to shop around.
Debt consolidation can be a good strategy provided that you take control of your finances and put in place and adhere to a carefully thought out plan to clear your debt. This means controlling spending, selling off those items you don’t need and keeping careful track of all your income and expenditure. And you must make sure that you make the best use possible of the cash that debt consolidation frees up.