There is no foolproof way of getting out of debt. All of the debt relief options have successes and failures. The failed attempts have varying reasons that can include being in the wrong program or inability to commit to the program. This is why it is important that you know the risks involved in every debt solution so you can prepare for them and make sure that you will be part of the success statistic.
One of the most frowned upon solutions for credit problems is debt consolidation loans. It is not that the concept is flawed. Financial experts do not make it a first option because it has a lot of potential to go wrong. But if you know what they are, you should be able to avoid them easily.
So what are the risks involved in debt consolidation loans?
First is the risk to grow your debt. This is how debt consolidation through a loan works. If you have mostly credit card debt, you want to make significant payments on your debt without having to pay so much on fees and interest rates. You will achieve this by getting a loan that has a low interest rate. The loan amount that you will target should be big enough to cover all your credit card balance. When your loan is approved, you pay off your credit card debts, thus having them all revert to zero balance.In most cases, people get tempted to reuse their cards simply because the balance is low. They are deluded into thinking that their debts are not so big when all they actually did was to shift the debt around. If you are not careful with your credit card, you may end up growing what you owe.
Another potential risk is losing a valuable asset. There are two ways for you to get a low interest loan: a good credit score or a collateral. These two will make you a low risk borrower. If you do not have a good credit score, you may resort to using a valuable personal asset to lower the interest on your loan. This is probably alright if you have a steady income but if that is suddenly compromised, you may lose the collateral that you used on your loan.
Lastly, there is a risk that you will not really learn your lesson. As important as it is to get out of debt, you want to make sure that you will not land in the same situation again. That being said, you need to identify why you got into debt and how you will ensure that it will not happen again. This is not part of the debt consolidation loan program as it only concentrates in paying off what you owe. It is only upon your own personal effort that you can successfully stay out of debt. Be sure to practice the right financial management skills that includes smart spending habits, savings and budgeting. These are the keys to prolonging the debt freedom that you worked so hard to reach.
One of the most frowned upon solutions for credit problems is debt consolidation loans. It is not that the concept is flawed. Financial experts do not make it a first option because it has a lot of potential to go wrong. But if you know what they are, you should be able to avoid them easily.
So what are the risks involved in debt consolidation loans?
First is the risk to grow your debt. This is how debt consolidation through a loan works. If you have mostly credit card debt, you want to make significant payments on your debt without having to pay so much on fees and interest rates. You will achieve this by getting a loan that has a low interest rate. The loan amount that you will target should be big enough to cover all your credit card balance. When your loan is approved, you pay off your credit card debts, thus having them all revert to zero balance.In most cases, people get tempted to reuse their cards simply because the balance is low. They are deluded into thinking that their debts are not so big when all they actually did was to shift the debt around. If you are not careful with your credit card, you may end up growing what you owe.
Another potential risk is losing a valuable asset. There are two ways for you to get a low interest loan: a good credit score or a collateral. These two will make you a low risk borrower. If you do not have a good credit score, you may resort to using a valuable personal asset to lower the interest on your loan. This is probably alright if you have a steady income but if that is suddenly compromised, you may lose the collateral that you used on your loan.
Lastly, there is a risk that you will not really learn your lesson. As important as it is to get out of debt, you want to make sure that you will not land in the same situation again. That being said, you need to identify why you got into debt and how you will ensure that it will not happen again. This is not part of the debt consolidation loan program as it only concentrates in paying off what you owe. It is only upon your own personal effort that you can successfully stay out of debt. Be sure to practice the right financial management skills that includes smart spending habits, savings and budgeting. These are the keys to prolonging the debt freedom that you worked so hard to reach.
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