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Sunday, March 1, 2009

How To Consolidate Debts - Help In A Difficult Economy

By John Brennan

People are being hit hard by our current economic situation, some of course more than others. Borrowing money just to hang on isn't the right thing to do although some have little choice. It's not easy planning ways to reduce your debt when you're barely hanging on to begin with. Still, while you can't ever get out of debt by borrowing more you can stabilize your situation by borrowing wisely.

When we borrow money it's often just the amount borrowed and the amount of the monthly payments we think about. The interest being charged needs to be considered as well, especially in long term loans or high interest loans. You can end up paying a substantial amount of money just on interest payments if you're not careful. Even the so-called no interest loans can carry significant penalties if not paid off in time. These penalties can come in the form of extremely large interest rates applied to the balance due.

You can take out a loan to help yourself without going even deeper into debt which seems to fly in the face of the rule stated above. If you have a number of loans already such as car payments, credit cards, money due on lines of credit and the like the total monthly payments can become overwhelming and you find yourself robbing Peter to pay Paul. A debt consolidation loan can be the answer here.

Debt consolidation loans are of course a form of borrowing but the difference here is, if done correctly, you borrow no more than you already owe and you pay a lower rate of interest and make lower, possibly much lower, monthly payments. So you haven't gone any deeper into debt and find yourself in a little better position financially than you were before.

The consolidation loan isn't the only option available. You might be able to get the interest rates reduced on existing debts. Reducing credit card interest is one area many people successfully explore. Or, you might consider having the term of a loan extended to reduce monthly payments. This may help in the short term but you have to be careful or you may be paying out even more. Another alternative is to seek help from a qualified third party to get more favorable terms on your outstanding debts.

The consolidation loan most widely used is probably the home equity loan. On the plus side you can usually get a lower interest rate with a lower total monthly payment and have only one loan to make payments on. On the negative side the available equity in your home will be reduced (which can at times cause huge problems) and your home becomes the collateral for the loan.

Making your payments on a home equity loan is a must. It's better to lose your car that to face home foreclosure. If in doubt seek a consolidation loan that does not require putting up your home as collateral. Such a loan, generally an unsecured loan, will be harder to find and will probably a higher interest rate. Do some research and figure out which approach makes most sense to you or seek assistance from a financial adviser.

Whatever type of loan arrangement you end up making it's key that you put your household money management practices in order. Start working to a budget and spending wisely. Treat your consolidation loan as if it is the last loan you could ever get and put off purchases whenever possible until you have the cash to pay for the. Easy credit will return once the financial crisis is over but you don't have to follow the sheep and spend your way back into debt.

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