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Loan Consolidation

Loan consolidation is a strategy that can be used to eliminate high interest loans. The process involves taking out a new loan to pay off outstanding debts. Therefore, debtors must have sufficient credit scores to obtain financing.

While loan consolidation may seem like a good idea, it's important to calculate the true costs before submitting a loan application. This is especially crucial when taking out a home equity loan which requires using real estate as collateral.

Homeowners that take out a home equity loan to pay off high interest debts are placing their property at risk. If they default on home equity payments the lender can initiate foreclosure proceedings even if borrowers are current with their first mortgage. It's never a good idea to put your home on the line to payoff outstanding debts.

Debt consolidation is appealing because it offers the promise of lowering monthly payments. However, consolidating debts typically prolongs repayment of debt by extending payment terms. Although borrowers pay smaller monthly installments, they accrue interest on the unpaid balance. When debt is extended for 2 to 4 years, debtors end up paying hundreds, if not thousands, in additional interest.

The truth is refinancing debt costs money. If you add 2 years worth of finance charges you're adding to the debt pile and taking away money that could be put in your pocket. Instead of consolidating loans, take time to become educated about debt management. This can be accomplished by learning money management skills from financial experts such as Suze Orman or Dave Ramsey or by entering into credit counseling.

Reputable credit counseling agencies are well-connected within the credit industry. While there is no guarantee counselors can convince creditors to reduce outstanding balances there are times when creditors will temporarily reduce interest rates or remove late fees and penalties when debtors are experiencing financial hardship.

At minimum, credit counselors can help debtors develop a realistic get-out-of-debt plan. They can also help debtors develop a household budget and offer suggestions for reducing monthly expenses.

Budgeting is a simple concept, but requires dedication to the task. Millions of consumers use credit cards to make daily purchases than pay the minimum amount due. This practice will keep consumers in debt for life because minimum payments barely cover the cost of accrued interest.

To succeed with budgeting requires spending less than monthly expenses. If your expenses are higher than earned income it's crucial to find ways to reduce expenses or increase income. To determine where you stand you'll need to create a list of fixed monthly expenses and income. Some expenses, such as mortgage installments, rent payments, and car loans can't be reduced. Instead expenses must be slashed elsewhere.

If utility payments fluctuate from month-to-month, consider enrolling in budget plans which allow you to pay about the same each month. If you subscribe to premium channels or the fastest Internet package, consider reducing cable packages down to the basics. If you have unlimited cell phone package, review the plan to determine if you really need unlimited access to everything.

If you spend a small fortune at the grocery store, consider purchasing frequently used items in bulk or shop at dollar stores. Engage in coupon clipping and review weekly sale ads.

If you need additional income consider taking on a second job or engage in bartering to reduce household expenses.

There are ways to reduce expenses or increase income. Sometimes it requires creative thinking to get the job accomplished, but it can be done.

Instead of entering into loan consolidation, develop a plan to payoff high interest loans. Tackle loans with the highest balance first and strive to pay all loans on time to prevent further credit damage.

These are just a few ways to reduce overall debt and work toward financial freedom. We offer additional strategies to overcome debt in our personal finance article library. Topics include: loan consolidation, debt settlement, personal bankruptcy, credit counseling, and home equity loans. Subscribe to our mailing list to receive instant notification of newly published personal finance and investing articles.

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Published on July 05, 2011 at 02:23 AM | Comments: 2

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Good article, never pay upfront indeed.

Sean Moore | July 14, 2011 1:21 PM


Very well written article. Especially during times where the interest rates are significantly low. Debt consolidation and refinancing can put a lot more money in the pocket of home owners when interest rates are as low as they are.

Anthony Flores | July 16, 2011 11:22 PM


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