To simplify your debt, debt consolidation loans work. But it’s only the first step on your way to debt relief. Without changing your spending habits, a consolidation loan is trying to borrow your way away from debt, which makes no sense. Debt consolidation makes sense if your interest rate is lower after grouping all your debt within the very same bill. But if the only reason for the lower rate of interest is a longer term, you can end up paying a lot more money in the long run.
Real debt reduction takes preparing
It takes careful planning to set up debt consolidation that saves interest and reduces debt faster. Numerous free debt consolidation calculators are available online. You can figure out all the factors that will determine if debt consolidation will work using these tools. Make a plan of action by experimenting with a variety of interest, payment and term combination.
Some of the best debt consolidation moves
A variety of debt consolidation opportunities can work for you. M.P. Dunleavy at MSN MoneyCentral reports on some of the best debt consolidation moves. If you have equity in your home, explore a home equity loan. A home equity loan carries a fairly low interest rate, presently in the high single digits, and the interest you do pay is tax-deductible. Refinance your car, a secured loan, and use the extra cash to pay down debt. A personal loan to settle credit card debt is a great choice, with less interest than you are paying to the credit card company.
Debt reduction snowball theory
Instead of debt consolidation, some financial advisers advocate keeping debts payments separate. Financial adviser Dave Ramsey likes what he calls the “snowball approach. Debts are paid off in full one at a time, from the smallest to the largest with the snowball approach. Ramsay says prioritize debts from small to large. Your first priority is paying down the smallest debt. The snowball approach motivates you with success by paying down the simplest debts first. But it takes many financial discipline, budgeting and saving for the snowball approach to work.
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