When you have a lot of debt, all you want is for it to go away and for the calls from collectors to stop. A debt consolidation loan may seem like an easy way to bring an end to your problems. The loan can sometimes reduce your monthly payments, but unless you also learn to change your spending habits, it won’t prevent you from going into debt again. Getting out of debt for good means taking control of your spending and learning to manage your money.
What Is Consolidation?
There are a few ways to receive a debt consolidation loan. You can apply for a loan on your own—such as a home equity loan—and use the lump sum to pay off your other debts. You can also work with a company that offers debt consolidation for a fee.
Consolidation sounds appealing because you typically end up with a lower monthly payment on the loan in exchange for a longer repayment term. Instead of juggling several bills a month, you need to pay only one. In some cases, the interest rate on the consolidation loan is lower than the interest rates on the original loans.
Risks of Debt Consolidation
Debt consolidation can be risky. Consolidating your loans doesn’t guarantee that you will bring an end to your problems with debt. About 70 percent of people who consolidate their loans end up with more debt just a few years later, according to U.S. News & World Report. Combining your debts together doesn’t do anything to change your approach to debt or debt management. If you combine your debts but continue to use credit cards, you’ll soon end up with the same problems.
You also risk losing your home if you consolidate your debt using a home equity loan, according to the Federal Trade Commission. If you consolidate your debt but are unable to make the payments, the company that owns the home equity loan can take your home away. In some cases, consolidation means you end up paying more over time, too.
What Can You Do Instead?
Changing the way you approach debt is one way to take control and to reduce the frustration of collection calls and the stress of not being able to pay your bills. We recommend switching to using cash only to pay for nonessentials, and buying them only after you’ve paid your bills and other priorities. The best way to cut down on debt is to keep it from accumulating, which means putting down the credit cards and changing the way you think about spending.
Creating a budget can help you change the way you approach spending. Understanding how much money you bring in each month compared to how much money you spend on necessities is an essential part of getting your debt under control. For example, your monthly income after taxes might be $2,500, and your monthly essential expenses—such as mortgage or rent, utilities, and groceries—might be $2,300. That means you have $200 left for the nonessentials every month. With a budget, you’ll be able to decide how exactly you want to use that $200: to chip away at debt even more, build your savings, or use it for something fun.
The trick to getting out of debt is learning new skills that help you manage the debt and changing the way you approach money. By taking an individual approach with each person, CESI has helped more than quarter of a million people change their relationship to debt.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY