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Debt Consolidation Loans - How They Work

A whole lot of people keep looking over their shoulder to see if creditors are hunting them down due to late or missed payments. This is fast becoming a common phenomenon among people, and its hurting us very badly. Check out the following list, and if you say ‘yes’ to a majority of them, you definitely need help with your debt problems:

  • The balances on your credit cards are rising, while there doesn’t seem to be a proportionate increase in income (or your salary is decreasing)
  • You are just paying the stated ‘minimum payment required’ amount, or even less than the minimum
  • You’re juggling bills e.g. you apply for a new credit card and use the cash advances available to pay off other bills
  • You’re constantly signing up for new credit cards when you receive news of their tempting offers by mail
  • You are using your credit card to purchase necessities like groceries, gasoline bill, etc.
  • You’re sneaking money from your savings or pension funds to pay your bills
  • You have no idea as to how much you owe, and aren’t really interested in finding out

A lot of people are turning to debt consolidation loans to solve their debt problems. You may have heard about it, but, just to give you a brief idea of what I’m talking about, it basically involves you taking out a loan to pay off your debts. The first thought that may come to your mind is, “what’s the point of this, I’m just getting another loan to pay off my existing ones, it’s as bad as getting cash advances using my credit card!”. Now, that’s where a lot of people misunderstand this concept.

Basically, you go to a debt consolidation company, and tell them about your problem. You then have to make a fixed payment every month to them, and they’ll use this money to pay back all your creditors. You’d have to pay interest to the company every month, but it won’t be a substantial amount because they generally secure this loan against your house, which would enable them to charge a low interest rate. Moreover, you only have to make a small payment every month (due to the fact that the payments are spread over a longer time), which really eases the financial burden on you.

However, what the debt consolidation companies never tell you is that, because your payments are spread over a longer period of time, you often end up paying much more than the amount that you would have spent if you paid directly to the credit card companies.

Moreover, if you consolidate debt it does not address the root problem. Instead of helping you rid the habit of taking out debts, it just encourages you to go deeper into debt.

Therefore, in conclusion, though a lot of people turn to debt consolidation for relief, it isn’t really recommended as the disadvantages clearly tell you, and you’d be better off going for credit counseling.