Can Debt Consolidation Make My
Financial Position Worse |
By Nathan Dawson |
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Debt consolidation is one of the best ways of reducing debt. Your
monthly payments become much lower and this will give you more
disposable income. Unfortunately, debt consolidation can also
make your position much worse. The reason debt consolidation can
be bad is you. You, and your bad financial habits. That is how
you got into debt in the first place.
Lack of financial
discipline
If you take out a debt consolidation loan you
have given your finances some breathing space. This means you
should cut up your credit cards and take on no more forms of
personal credit. This is because even though your payments are
lower your outstanding level of debt is the same. It has just
become more manageable.
If you do not get disciplined in
this area you will find yourself in deep trouble. If you rack up
more credit card debt, you will have to meet the payments of the
credit cards as well as your debt consolidation loan payments.
The reason you got the loan in the first place was to relieve
the strain to debt. This is one surefire way of getting in more
financial trouble.
Credit is not your money
Many
consumers feel that the available credit on their credit card is
their money. Once a credit card balance is paid off you are not
in a position to use that money again. By using that credit
facility you are entering more debt that ultimately will have to
be paid. The best way to stay out of debt, is to not use easy
credit and to realize that credit is not your money.
Your
house could be at risk if you do not keep up repayments
Most of the basic forms of credit like overdrafts, credit cards
and personal loans are unsecured forms of debt. This means that
the money lender has lent you money based on information you
have provided to them about your income and your ability to
service repayments without requiring any form of security to be
placed against the debt. The main reason these forms of credit
are unsecured is because the amounts are normally small relative
to the applicants income.
Debt consolidation loans, on
the whole, are secured loans, normally secured against property.
This is why rates can be lower than high street personal loans.
It is necessary for the loans to be secured because each person
who applies for a debt consolidation loan is classified a credit
risk and has a track record of getting into debt. To offset this
risk, the money lender will ask for security to be placed
against the loan. If you fail to make payments on your loan then
you may lose your security.
This is why self-discipline
is so important in debt reduction because you may easily make
your position far, far worse if you continue to treat debt in a
frivolous way |
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