Much like an unsightly car crash on a highway, too much borrowing can cause you to be the unlucky victim of an inadvertent debt pile up. Debt piling happens when one avails an excessive amount of credit either by taking out loans for assorted functions or through excessive use of charge cards.
Oftentimes, debt piling can begin early in one's life with education loans. As life advances, this graduates to more substantial financial obligations like car loans, home loans and personal loans. Add to this the lure of simple spending through multiple charge cards and before you understand it you have lost track of what you owe whom. Postponements and defaults becomes the order of the day and poor credit ratings threaten to haunt you for the remainder of your fiscal life. !
Debt consolidation is the clubbing of all types of owed debt to form one entire owed sum. This may subsequently be repaid through one way of finance, usually financing. A lot of individuals discover that it's difficult to deal with debt; either monitoring or making payments. Some take on debt at a time when they're fiscally sound or suppose a rise in income will help pay-off dues with time. Nevertheless, ill unfavorable financial conditions can change credit servicing skills. Still others may just have availed credit at a time when credit was usually high-priced and with more economic offerings accessible over time look to refinance loans. !
Imagine you choose to really go for a personal loan (i.e. a debt consolidation loan) of Rs.3 lakhs @ 15% p.a. for 5 years to pay off both these loans. This may translate into an EMI sum of Rs. 7137 per month and Rs. 85,644 for one whole year.
The exact same principle could be applied to outstanding dues on multiple charge cards. If you max out your cards or can not pay dues in time, you'll be charged interest on balances owed. By paying off these dues with a different credit card or financing at a lower rate of interest, you save cash.
Debt consolidation is a good move if present rates of distinct debts possessed through an individual are higher in relation to the loan that he or she can to avail on a debt consolidation loan. This is subject to advantageous conditions and only when savings are large.
Nevertheless, debt consolidation isn't a magic wand that could remove all debt-related problems with one touch. As with most financial instruments, debt consolidation, also, has its advantages and disadvantages. While it may work as a charm for few individuals, others might do better without it.
- If you are worried about your credit score then debt consolidation may not be recommended. Nearly all debt consolidation devices can affect your own credit score negatively. But if this hit on your own score is not as terrible as the hit it might have taken from nonpayment on existing debts, it might be worth it. No pain, no gain! !
- If you are borrowing money against your home then debt consolidation may not be a favorite move since, even though the rates may be quite a bit less, the loan would be secured against a really precious asset - your house. Any failure to clear your debt consolidation loan would get you in larger problem. !
- In the event you do not change your spending and repayment habits, debt consolidation mightn't work out very well for you. Debt consolidation could get you from a pickle but inferior fiscal direction will always leave you in a jam. An unsavory one at that. Once you have repaid your dues, ensure you do not let debt pile up again.
- For those who never have done extensive research regarding debt consolidation, it may not give the most effective results. Understanding all of the advantages and disadvantages of attempting to merge your debt is required to make it work for you. Comprehend all terms and conditions attached with the new in addition to present loans, particularly interest rates and repayment schedules and prepayment fees. Do your math! !
In case you still can not determine if it is the correct choice for you, seek help. Many financial counsel provide services with regards to consolidation and removal of debt. Debt consolidation may seem as a charm, yet to get it to work like one, you should be aware of the best way to utilize it sensibly. Research is the initial step towards determining to go for it but appropriate use is the only way it can help you out of the vicious circle of debt. !
Posted on April 29, 2015 at 12:42 AM