It may seem really astonishing but you can get on top of your existing debt problem simply by taking on an additional loan. This technique goes by the name of debt consolidation, which is essentially a method by which you take a personal loan to pay back all your existing credit card debt, and then pay back the new loan in easy monthly installments. This is a very handy method to deal with multiple credit card debt that you simply cannot keep track of and pay the monthly dues on the due dates. However, by exercising a lot of determination and financial discipline many people have also used this method successfully to recover from a bad financial situation.
What You Can Do To Get On Top Of Debt
The case of Emilie Burke, a college graduate residing in Raeford, North Carolina is a typical example of what you could achieve if you are sincere and determined. Emilie was able to retire $6,000 from her accumulated credit card debt of $13,600 by taking a personal loan from an online financial company. Thereafter, by using balance transfers systematically, paying off her monthly dues regularly from her salary and a weekend waitressing job, she brought her total outstanding to a far more manageable level of $2,500. She also made a custom budget with the help of an online financial planner and vowed not to carry her credit cards with her anymore so that she’s better equipped to resist the temptation of impulse buys. This is exactly the kind of determination that is required for climbing out of your credit card debt trap.
Is a Consolidation Loan a Bigger Trap?
According to a representative of the National Foundation for Credit Counseling, with extensive experience of debt collection, credit counseling, and loan marketing, many people use debt consolidation loans to wipe out their accumulated credit card debt but manage to get back into serious debt within just one year. This essentially means that they have just dug themselves into deeper trouble. An Association for Financial Counseling and Planning Education study corroborates the observation as it found that 87.5% of the surveyed respondents incurred more debt within 12 months after they had undertaken debt consolidation. Another research project using data drawn from the Panel Study of Income Dynamics, a survey of personal finances of Americans that’s been running for long, reported that there were no difference between the rate of bankruptcy filings among people who had taken a loan for consolidation debt and those who hadn’t.
The type of loan also dictates to a large extent the risk people undergo when consolidating debt. In most cases, you should be able to save on the interest by a fair bit as interest rates of personal loans are usually lower than that of credit cards. However, you need to keep a sharp eye out and negotiate the best you can, given your credit profile and debt-to-income ratio. Another way of driving the interest rate down is to offer collaterals to secure the loan, such as the car and other assets. You should, however, be very chary of giving your home as a security as a reversal of fortunes could leave you and your family without a roof over your heads. Similarly, borrowing from a retirement account is hazardous as you could face extra taxes and even penalties if you do not pay the sum back on time.
Things to Keep In Mind for Best Consolidation
Make an objective assessment of your finances. If your monthly outgoes on credit card repayments, consumer debts, and other essentials like medical bills exceed half of your monthly income then the best thing may be would be to file for bankruptcy under Chapter 13 or 7. Evaluate the cost of the new loan being taken to replace your old debt, and make sure that you take up the shortest possible tenor as otherwise; you will end up paying a whole lot of interest over the extended period. Most importantly, lock your credit cards away so that you do not succumb to the temptation of impulse purchases and get yourself in a bigger rut.
Taking a loan so that you can pay back your accumulated debts is a good idea provided you exercise determination and discipline. Looking out for the loans that cost the least and limiting the tenor to the minimum are effective ways of getting you out of the debt trap fast. However, you need to avoid using your credit cards and getting into debt again.