The RIGHT Way to Do a Debt Consolidation Loan [VIDEO]
People sometimes take a debt consolidation loan, only to find out that it "doesn’t work" - that is to say that it doesn’t get their debt problems fixed. In most cases however the problem isn’t the loan, but rather the way that you manage it.
Here are some strategies that will help make your debt consolidation loan work the way it’s supposed to.
Include All of Your Debts in the Debt Consolidation Loan
When doing a debt consolidation loan, it’s important that you include all of your debts in the new loan. There can be a temptation to hold one or two loans outside of the new loan, against the possibility of using it for fresh credit. The best advice: Don’t!
The purpose of a debt consolidation loan is to get your debt problems fixed once and for all. Unless you include all of your debt in the new loan, you may be setting yourself up for failure.
Don't Take on Any New Debt until Your Debt Consolidation Loan Is Paid
If you take a debt consolidation loan, and then take on additional debt, you will be completely defeating the purpose of the consolidation. The purpose of a debt consolidation is to eliminate your debt. Adding new debt will not allow this to happen.
It’s easier to fall into this trap that you think. This is especially true if the debt consolidation loan results in a significantly lower monthly payment than what you had on your unconsolidated debt. The extra room in your budget can trick you into believing that your financial situation has miraculously improved. It hasn’t – at least not until the debt consolidation loan is paid in full.
Help Get Your Debt Problems Fixed By Building Savings
A debt consolidation loan can really work wonders when you combine it with a commitment to build savings. Savings can be a real way to get your debt problems fixed on a permanent basis. It will provide you with a cash source so that you don’t have to use credit whenever you need money.
If your debt consolidation loan lowers your monthly debt payments, you should use the extra cash to fill your bank account. As your bank balance grows, your need to use credit will gradually disappear until it no longer exists. Mission accomplished!
Gradually Eliminate Unnecessary Expenses
Participation in a debt consolidation loan should be a signal to begin cutting costs in a serious way. Lower expenses will enable you to either payoff your debt consolidation sooner, or increase the amount of money that you have to put into savings.
Eliminate unnecessary expenses. This can include premium cable or cell phone service, unused memberships, and recreational spending habits. You should also plan to postpone any vacations until after your consolidation is paid.
You should also seek to reduce any other expenses that you have. Look for ways to save money on groceries, eliminate unnecessary driving, and keeping your heat and air-conditioning settings at more modest levels.
Cutting your basic living expenses by just a couple of hundred dollars per month can go long way toward making your debt consolidation effort work more smoothly.
Watch out for Debt Consolidation Traps!
Common debt consolidation traps include:
Paying high upfront fees that only increase your debt
High interest rates that increase your monthly payment
Extended terms that keep your debt consolidation loan open for many years
The best way to avoid debt consolidation traps is by working with reputable lenders and providers.
Check out a lender such as Prosper, or one of the other debt consolidation loan companies reviewed and recommended on our site. A good lender will get your debt problems fixed in less time than you think!
On the road to debt relief, getting your finances in order may feel like you're walking on a tightrope. Click to learn how to achieve financial stability by maintaining a balanced budget.