How Debt Consolidation Can Go Wrong
By: Michael Strauss
It's no secret that in today's society personal debt is becoming more and more of a problem. After years of easy access to cheap credit, and a willingness by lenders to extend lines of credit beyond that traditionally deemed acceptably safe, the number of people who are beginning to experience problems maintaining their repayments is on the rise.
While we have yet to return to the recession years of the late eighties and early nineties, it's pretty clear that the boom years of the last decade are finally over, and it's time to face up to the financial situation many of us find ourselves in.
For many, this means that positive action needs to be taken over debt levels. Whether or not you're currently having trouble making your payments, the economic uncertainty ahead means it's only good sense to try and get a handle on the situation now while there's still a wide range of options available.
One of the most popular ways of easing debt pressure is to take out a consolidation loan. At its simplest, the idea is that you pay off all your current debts by taking out one large, cheap loan which will mean you only have to cope with a single monthly repayment of a lower amount than your combined previous repayments before consolidation. Unfortunately, nothing in finance is simple, and there are a few things to look out for if you want to stop your consolidation plan going wrong.
Firstly, and this may sound obvious, make sure that your new loan costs less than your current debts. Your initial quote may look attractive, but once you take account of sometimes hidden costs such as broker fees, the loan might not actually be such good value - especially if these fees or charges are repaid over the loan term rather than up front. Always recheck your figures before signing on the dotted line.
If your new loan is going to be secured on your home, you must make absolutely sure that you can afford to meet the repayments, even if your income drops a little in the future, if you're not to risk losing your home. Getting into trouble with unsecured debt is traumatic, but being evicted from your home is devastating.
Once you've actually received your loan advance, ensure that you really do clear your existing debts. Don't be tempted to use some as 'fun money' - you'll pay dearly in the long term if you do. Consolidation is a serious business and it should be treated as such.
Once your debts are cleared, don't just leave your credit card accounts and other lines of credit lying around with all the temptations to spend that that involves. Write to the lenders explicitly telling them to close the accounts, to ensure that you can't use them in the future.
Finally, take heed of the fact that your finances were in such a state that consolidation became necessary, and don't be tempted to start down the same track again by applying for new credit cards or loans. The worst possible scenario is that you again run up substantial unsecured debts, combined with the large secured debt you took out for consolidation - this is almost certain to lead to disaster.
Michael writes for Loan Vision, where you can easily compare personal loans for consolidating debts or any other purpose.
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