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How to Make the Most of Debt Consolidation

If you're burdened with a substantial amount of consumer debt, debt consolidation could be the key to regaining financial freedom. Debt consolidation involves taking out a new loan that allows you to pay off your current debts. You then have only one monthly loan payment instead of several bills due each month. In most cases, debt consolidation loans have the added benefit of carrying lower interest rates than credit cards and other types of consumer debt.

Choosing a Consolidation Loan

Homeowners with substantial equity built up may be able to refinance their mortgages to obtain funds for debt consolidation. A home equity or cash-out refinance loan for consolidating debt involves using your home as collateral. For those who prefer not to refinance or lack sufficient equity to obtain a debt consolidation loan, personal loans are another option. Although personal loans for consolidating debt are likely to have higher interest rates than home loan refinances, the interest charged is still likely to be lower than consumer credit accounts.

Whether you choose to refinance your home loan or take out a personal loan for consolidating debt, you need to take steps to ensure the process works to your advantage. This involves carefully considering and evaluating the terms of your new loan.

One important consideration is the length of the loan, and how quickly you can pay it off. Debt consolidation loans usually offer lower interest rates than other credit accounts, but if you take 30 years to pay back your loan, you may end up paying more interest than you would through aggressive repayment without a new loan.

Consider that debt consolidation essentially involves taking on a new debt. The debts you pay off don't go away, they are simply re-packaged into a new loan. Consolidation loans make repaying debts more convenient and in many cases, more affordable in the short term. It's an opportunity to regain control of your finances and start paying off your debt, but only if you control spending.

Spending Control is Crucial

One of the biggest mistakes people make when consolidating debt is neglecting to change their spending habits. They fail to make changes in terms of how they use their income and approach credit, and the results are disastrous. In addition to their debt consolidation loan, they find themselves burdened with additional debt. They risk losing their home and ultimately face impending bankruptcy.

The reason many people fail with debt consolidation is because they see zero balances on their credit cards as a green light to start spending again. To avoid temptation and simplify your life, close all but one of your credit card accounts following consolidation. Consider that one card completely off limits except in the case of an extreme emergency. Switch to living on a cash-only basis and rely on a debit card linked to your bank account for payments that are fast, convenient and debt-free.

Take Full Advantage of Consolidation

If you create a budget and stick to it, it's likely you'll have "extra" money at the end of the month once you've consolidated your debt. This is because your new loan payment may be less than the total payments you were making to all of your creditors in the past. Use this extra money to create an emergency savings fund you can rely on when emergencies arise. This is a smart strategy that will help you avoid accumulating new debts going forward.

Once your spending is under control, you can start to create long-term financial goals. As you become better at working within a monthly budget, you'll find new ways to save even more money. You can use this money to start a college fund, save up a deposit on a new car, or start contributing to a retirement account. Creating a road map for your financial future that counts on freedom from debt is a great way to make the most of debt consolidation.

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