Debt Consolidation Loans

Debt Consolidation Loans

Debt consolidation loans areone of the more controversial arenas in the realm of financial planning. Some financial advisors hate debt consolidation, and other advisors love them.In this article we’ll break down the pros-and-cons of such a loan, and consider whether or not it’s actually a good idea.At the end of the article there are some links that can help you continue researching debt consolidation loans. But first, some definitions.

What is a Debt Consolidation Loan

A debt consolidation loan is aloan that you aregiven in order to “consolidate” your other loans. For example, let’s say you have 5 small loans. A debt consolidation loan is where you take one big loan and pay the small loans off — thereby consolidating them.A debt consolidation does NOT reduce your debt directly. It consolidates your debt. I’m still a fan of the loans because I think it should be a given that re-organizing your financial situation makes it much easier to achieve your goals.

If you’re going to get rid of items in your closet, you should probably reorganize and clean it first — same thing goes for debt and debt consolidation loans. Let’s talk about the disadvantages and then the advantages of getting a debt consolidation.

The Disadvantages of a Debt Consolidation Loan

Before we cover the advantages of a debt consolidation loan, let’s look at some of the disadvantages first:

• Isn’t Doing Anything. As I explained above, some financial gurus, like Dave Ramsey, are against debt consolidation loans because they think they achieve nothing except organization.

  

• It Takes Longer. Some debt consolidation are where you agree to pay less money, but over a longer period of time. This, of course, depends on the debt consolidation loan itself — each one can be different.If you have any more concerns about a consolidation, feel free to list them in the comments for other readers. Any personal experiences or even professional advice would be appreciated.

The Advantages of a Debt Consolidation Loan

Now let’s check out some of the advantages of a debt consolidation loan.

• Lower Interest Rate. A debt consolidation can give you an overall lower interest rate. This mea ns you’ll be p aying “less” for your past loans, while still making it easier to pay the loans at all.

  

• Fixed Interest Rate. Getting a fixed interest r ate is essential for a secure financial plan. A changing interest rate makes your future less predictable. You can “trade” your changing interest rates for a fixed interest rate.

• Easy Organization. Having 10 loans and debts to repay and keep up with ca n be hectic — leading to acci dental mixed payments, or just unnecessary discomfort. Getting a debt consolidation loan ends all of this.

How to Get Out of Debt Automatically

The fundamental way to actually use a debt consolidation loan to get out of debt is tounderstand what it is and isn’t doing. It is making it possible for you to automatically get out of debt. Here’s how:

• Get a Debt Consolidation Loan.

• Get an Online Bank Account.

• Get an Automatic Savings Account.
  

You can automatically pay off the debt with a few clicks of your mouse. As I explain in the last “step” above, you can set your online savings account to put money aside automatically. You can also have that money automatically sentto someone else — like to pay off your debt.By consolidating your debt, and making the payments automatic, you can pay your debts off automatically. Just set up the automatic payments, and pretend like your make just a little less money. You’ll be on your way to getting out of debt in a well-organized and efficient manner.You can do this if you have a debt consolidation because you’ll only have to send money to one company rather than several — streamline your finances, and your finances will take care of themselves.

Conclusion and Last Thoughts

Debt consolidation loans are thought by some to not make a huge change in one’s financial situation. I think that’s a bit wrong, because a consolidation allows one to be more organized and allows one to have a “big target” to hit, making the debt free journey easier.A debt consolidation loan even allows you to set up your finances and banking to pay off your debt automatically — if that’s not a good financial decision, I don’t know what is.

1. Getting “Debt Consolidation” Loans.

Debt consolidation is extremely popular in a lot of circles for a reason: most people who encourage you to “consolidate” your debt will make money if you do. Basically, a debt consolidation is when someone agrees to “consolidate” all of your debt into a new debt with lower interest rates. The only catch is that they’ll force you to stay in debt longer, and you’ll pay more money in the long run. So much for helpful advice.The only time a debt consolidation is a “good” choice is if you simply cannot pay current interest rates. This is rarely, rarely, rarely ever true. Chances are, there’s a better way to pay the payments than a consolidation.Getting a debt consolidation is basically a level of surrender, meaning you’ll be paying more money over a longer period of time. Remember, debt consolidation is also a type of loan — in other words, you’re literally fighting fire with gasoline. Not a good idea.

2. Trying “Debt Elimination” Scams.

If someone offers to “eliminate” your debt without analyzing your situation, just run away. It’s a scam, and they are literally out to get you. There really isn’t anything more to say. The hard truth is that there’s no way to “eliminate” your debt without finding ways to make more or save more money.

3. Closing Credit Card Accounts.

One of the biggest mistakes sounds like it makes sense. Closing a credit account sounds like one is taking control, telling the debtors “no more debt” and is taking a step in the right direction. Unfortunately, it can hurt your credit rating.By closing a credit account, creditors see that you’re movingaway from debt and can’t handle the “temptation” — bad sign. If you feel the need to live without credit, just shred your cards — but keep the accounts open for the sake of your credit score.

4. Making Only Minimum Payments.

Minimum payments are your enemy. The entire reason companies are willing to loan you money is that they’ll be making more. They’re literally selling money for more than it’s worth. The way they make money is through you not paying off your debt as soon as you get it.There’s also a reason the minimum-payment requirement is so low: the lower it is the longer you’ll be in debt. The longer you’ll be in debt, the more they can charge you. Don’t pay the minimum — ma

ke up your own minimum and pay that instead. Shoot for triple the minimum payment, at the very least. Otherwise, you’ll be in debt prison for years longer.

Conclusion

Financial planning is the crux of financial security and freedom. If you want to find a comfortable lifestyle, then it can’t be overstated how much you need to master the basics ofFinancial planning. Without a clear, concise plan for how you are going to manage your money, your chances are slim of ever achieving your goals.To learn more about the fundamentals of financial planning, check out Financial Planning 101, then feel free tobrowse the rest of the pages and guides.