Consolidating Debt - What You Need To Consider
When it comes to consolidating debt, many people may presume that the benefits are obvious, therefore it goes without saying that they should go ahead with consolidating their debt. However, there are situations when consolidating debt may not be the best thing to do at all.
So, before making any decision on consolidating debt, you should gather all the relevant information. Once gathered, try taking a contra view about the consolidating option. Why not start from the presumption that consolidating debt is not a good idea, and then try to convince yourself that it is? After all, the marketing of consolidation loans, and the superficial figures, may all pressurise you into thinking that consolidation is the answer to your financial prayers. It never does you harm to at least consider the opposite view.
When Is Consolidating Debt Not A Good Thing?
The personal financial situation of everyone is different, so you cannot presume that if consolidating debt is good for one person, it is good for another also. That is not so. You should examine all your options closely before taking the plunge into debt consolidation. Here are a few suggestions to help that process:
Why are you considering consolidating your debt?
This may seem quite obvious, but I wonder how many people really answer that question before going ahead and consolidating their debt with a new loan? Ask yourself bluntly, and only when you have come up with the real answer can you progress to the next stage of the consideration process.
Is your answer that you can save outgoings of $50 month, or some other figure, by consolidating your debt? Let's say that it is $50 per month you will appear to save. Is that a figure you would be more comfortable with? If so, why not give a bit of time to examining two other ways of achieving that same comfort level.
Firstly, write out your monthly budget. Take a critical look at each item of expenditure, and see if there is an easy $50 you can cut out somewhere. There probably is. Or you can approach it another way, and total up your absolutely necessary and unavoidable monthly outgoings, and work out the difference between that total and your net monthly income. Now, take that resulting figure, deduct the $50 you want to save, and work out a new budget based on that new net figure. Can you live with that? Probably, if you are determined enough.
Secondly, increasing your income by that $50 per month would have the same effect. Easier said than done? Well, maybe, but at least give it some thought. You have talents and experience at various things. Can one of those not be used to earn a little bit of extra money somehow? I am sure if you examine the possibilities closely, you will come up with at least one idea. And that idea could not only save the hassle of consolidating your debts, but also may be the nucleus of future enterprise that will improve your finances no end.
Check out the interest charges on loans for consolidating your debt.
It makes sense to work out the total amount of interest you are paying each month with your existing loans, and then compare with the total interest on a consolidation loan. If the interest is higher on the consolidating loan, or even if it is equal, there may be no net financial benefit in consolidating your debt at all. That means your "saving" may only be a reduced monthly payment due to the new loan term; in which case, why not concentrate on reducing your expenditure or increasing your income by that "saving" instead, as we discussed above. Your personal assets will be all the better for it, whereas running from one loan to the next is likely to have the opposite effect in the long run.
Check the costs of the consolidating loan and penalty charges on repaying existing loans.
If it is a close call whether a consolidating loan is a good idea, then the deciding factor could well be the costs associated with the new loan, and the penalties, if any, on existing loans you wish to consolidate.
If you consider all the above, and you are still convinced that consolidating your debt is the best and only way, then at least you can say you have made the decision based on considering all the obvious options, and have not simply been swayed by all the advertising you have seen for consolidation loans.
