The Pros and Cons of Debt Consolidation

How Does Debt Consolidation Work?

Debt consolidation usually involves taking out a low interest loan at a fixed rate to reduce monthly payments. This often entails rolling many loan amounts into one. An asset is used as collateral for the new consolidated loan. The most commonly used asset is a home. This means that if the consumer defaults on the loan, they agree to allow the house to be sold to collect the remainder of the funds. This method of debt management is usually secured to pay off student loans or credit card debt that carries large interest rates that may increase frequently. There are pros and cons to debt consolidation.

The Positive Side of Debt Consolidation

On the positive side, it allows consumers to pay down the principle amount faster. As a result, credit scores may increase. This is especially useful when the consumer is trying to secure a mortgage to buy a home. The consolidation takes many small payments, with variable high interest rates and rolls them into one monthly payment with a lower interest rate. This takes away the stress caused by trying to manage many payment due dates to avoid late fees. The smaller payment makes it easier for most people to create a budget they can stick to.

Debt consolidation loans often extend the original terms of a loan. If the balance would have been due in six months, the deadline can be moved back to 12 or 18 months without penalty. If a home equity loan is involved, the interest may be tax deductible.

The Negative Side of Debt Consolidation

One of the disadvantages to this type of program is that it does not teach the consumer new habits, it just enables them to continue the bad spending habits that have already been established. If they don’t stop using their existing cards, debt will continue to build and their credit may be negatively affected.

Debt consolidation does not work for everyone. Many people believe that a consolidated loan is easy to get. While that may have been true at one time, it is not today. If your credit is still in good standing, it may be the most appropriate option. Though the monthly payments and interest rate has been reduced, the amount due has not. This means that the loan has been stretched out which will possibly take years to repay. It is only shifting the debt from immediate to long-term. Many people find debt settlement more appropriate for their situation.

The Long Term Impacts Of Saving

It’s pretty obvious that in the short term, saving money rather than spending it is going to benefit us financially, but what about other, more long term impacts of saving? It seems like more and more emphasis is being put on spending money, and ever since the 1980s where excess and spending really came to the fore, this has been the case. These days though, things are a little different, and affluence is not quite so wide spread or common place for most of us. So the impacts of our old spending habits are proving more and more important to break.

Saving with John and Lee

It’s always good to talk in terms of examples when looking into a concept or explaining an idea, so let’s run with one here. John and Lee have two kids, Rick and Sally. John works a regular job where he receives an average wage, and Lee is looking to start looking for online jobs after having been at home with the kids up until now. The couple have a mortgage, a few credit cards and store cards, as well as a personal loan and car loan. Nothing too special in terms of their circumstances here, and something you would be likely to find in your neighbourhood.

If Lee and John manage to save a little money by reducing their spending habits (which often takes but a little adjustment here and there), their family finances can look a lot different. There are unnecessary excesses in all our lives, and if we are honest with ourselves we will be able to name them pretty quickly. These excesses may involve occasional shopping sprees, regular spending on things like cigarettes and alcohol, entertainment or leisure activities that we really do not need to partake in – whoever you are, whatever your lifestyle, there are things that you do not need to be spending your money on.

Turn your spending into saving

By turning that spending to saving, you are having a marked impact on your finances and your life. Let’s return to our example. By reducing their spending by just $100 a month and instead turning that money towards reducing their levels of debt, John and Lee are choosing more than just financial savings. By paying the extra off their credit card, they are saving a bunch of interest. If they continue until one of the cards is repaid, and then snowball the minimum credit card repayment and the $100 towards paying off the next debt, they will be surprised at how quickly their debt is looking lighter – all from such a little sacrifice.

The long term impacts of reducing their spending and therefore their levels of debt is enormous. Not only do they save money, but their family life will improve as they no longer struggle under the burden of owing money here and there – in effect limiting their lives. The kids will be able to learn valuable lessons in regards to debt and saving money and have positive financial role models for managing their own personal finances as their grow older. If the family is able to start saving money and putting their money to work for them, then the possibilities really are endless – and all it takes is a simple mind shift, a decision really, and then to follow it up with concrete action.

Daily Spending Back on Track

Dear mamma joe! I’ve been busy lately . . . so busy . . . absolutely crazy busy. Work is mad as hatter and family life is busy to say the least.

But enough of the rubbish excuses! Daily Spends is now back on track (for today anyway). Wann know what I spend yesterday? Well do ya?

Here you go:

coffee – £0.20
cake – £1.00
fish ‘n’ chips – £8.45
Total Spends = £9.65

PS – i’m now getting a lift to work which is saving me over £200 per month! Whicked eh?