There are several options available to you when you feel your personal debts spiralling out of control, though debt consolidation loans tend to be one of the first things people consider. When you are deep in debt with a long list of separate creditors to deal with, 7 options for borrowing money and when to use them the idea of having only one payment to think about can seem very attractive. Indeed, the simplification that consolidating your debts brings is one of the main benefits of such loans.
It is important to look beyond this basic benefit and consider carefully whether taking on another loan is really going to help you to manage your debts. Generally speaking, the best solutions to debt problems should not involve spending more money or getting deeper into debt.
The reason your monthly payments can be lower with a debt consolidation loan is usually that you are spreading your debt over a longer period of time. When you add up what you are paying over that period, you will often find that it is more than you would have spent with all your separate debts.
There are certain circumstances in which taking on a new loan can be a good thing, and others when there are better options. You need to consider these carefully before committing yourself.
When Debt Consolidation Loans May Be The Best Option:
- When the debts you currently have are at very high interest rates
- When interest rates have dropped and you may get better terms now than when you took on your other debts
- When you have properly considered your financial situation and know that you can afford to make the new payments
When Debt Consolidation Loans Should Be Avoided:
- When you have taken out a debt consolidation loan before and you have not kept up with payments
- When you want to use the loan to pay off another debt consolidation loan
- When you plan to use the loan to pay off credit cards or store cards so that you can use them again
If you have consolidated your debts with a loan before and it has not worked, do not do it again. You need to break the cycle of borrowing more money and deepening your debt. There are other ways of tackling your debt without involving loan companies or anyone else with an interest in selling you something.
Preparing financial statement will help you to identify what you can actually afford to pay each month. It is vital that you have an accurate picture of your finances, so that you do not agree to anything that is beyond what you can afford. If you are going to take out a loan to pay off debts, make sure you shop around because interest rates vary enormously.
You do not need to take out a loan to consolidate your debts, and the best way is usually through a debt management plan. This is where a debt management company negotiate with your creditors for you, and you end up just having to make one payment to the company instead of to all your creditors.