Debt Consolidation: Who Wins and Why Risk It?

As far as I’m concerned, there is only one thing that anyone should do regarding debt consolidation – that is, if at all possible, stay away from it!

Getting out of debt, or finding ways to minimise your debts is very important, and I must admit that at times, debt consolidation can be very tempting, and that in some cases may even work.

However, consolidating debt isn’t getting debt free – it can be a step along the way, but only if the money that is freed up is spent releasing further debt.

Human nature being what it is, many people spend the ‘extra’ money on consumer goods that they can now ‘afford’, or they may even go into new debt.

This defeats the purpose, and can lead to even greater financial pressure.

Getting debt free involves a whole new mindset, and borrowing more money usually doesn’t achieve the required result.

Refinancing deals are always balanced in favor of the lender. If they weren’t, there wouldn’t be anywhere near the number of firms competing for this section of the market.

Taking out a new loan means paying interest over a longer period, as well as the cost of payout costs on previous loans, and the interest that had already accrued on them.

When considering a debt consolidation loan, one needs to stop and ask exactly why they are heading down that track.

It is easy to get excited, enjoying the thrill of the prospect of more disposable income, but a month or six down the track, if you spend up again in the meantime, is when the reality will set in.

It’s a good idea to remember that borrowed money belongs to someone else, and they want it back. With interest.

Before considering debt consolidation, have a look at your budget, and check for money leaks.

Do you have a subscription that you are still paying for, but not using? Cancel it, and save some money!

How about transport costs? A well tuned and serviced vehicle costs less to run and maintain, and will likely have fewer major mechanical problems then one that isn’t.

Looking for areas of waste, saving money and paying it out on bills can go a long way in helping to get out of debt.

A major reason for refinancing is simply to cut the number of payments that have to be made on a regular basis!

While this is very understandable, there are other ways of doing it, but they do take longer.

Try saving money in different areas, and pay the money saved out on the smallest debt first. Once this debt is dealt with, pay the extra money, and the money that you were paying on that debt towards the next one, and so on.

This can take a bit of time, but has a snowball effect as each debt is paid.

The effect isn’t just financial, but reflects on your self esteem as well.

Being in debt can affect relationships and cause added stress.

Paying out the bills not only relieves stress, but brings a new sense of empowerment and personal freedom as well.

Making extra income, either online or working an extra job maybe handy, but as Robert Kiyosaki says, a well paid slave is still a slave, and until one cuts their spending, and gets out of debt, that is what they will be!

There is also a danger of of spending extra income on lifestyle choices, rather than paying off debt.

Often, debt levels can increase with higher income, and discipline is needed to avoid this as well.

A simple action plan to get debt free:

Create a budget!

Track where your money is going, and cut wasteful spending.

Use all the money saved to pay out debt and begin a savings plan!

Start with the smallest debt, and move on to the next one.

After you pay each debt, give yourself a pat on the back, and a small treat.

Look for a high interest savings account and put any spare cash there as it becomes available.

Avoid unnecessary and undisciplined spending!

Taking simple steps such as these may help you become debt free, without the burden that a new loan could!

Please Note:

I am not an accountant.

This article is general in nature and as such shouldn’t be considered as specific financial advice.

This article is based on my opinion, and experience.

If you are having problems with paying bills I’d recommend that you seek help from a financial advisor.

When seeking an advisor, choose one who isn’t tied to a financial institution, and who may have an interest in selling you a loan. Always ask first!