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Using Debt Consolidation Wisely
By Martin Sumner
All across the web you'll see advertisements touting debt consolidation as an easy ticket to financial freedom, and if you're struggling financially then their promises can seem very enticing indeed. However, what the marketing people don't often tell you is that unless you use consolidation wisely it can actually make a bad financial situation even worse. You could end up with even greater debt problems, and even run the very real risk of losing your home.

Having said that, there's no doubt that debt consolidation CAN work for you, so long as you use it wisely. So what should you be considering before committing yourself to taking out that loan?

The first and most basic factor to weigh up is whether or not you can get a loan at a low enough rate to make it worthwhile. The basic premise behind consolidation is that you're attempting to lower your monthly repayments in total. If, after adding up all your current credit commitments you find that a loan you're offered can clear them all and yet result in a single lower monthly figure then it's worth seriously considering. If poor credit or other factors mean your loan is more expensive and won't give you a considerable or even worthwhile monthly saving, then debt consolidation might well be a seriously bad move.

The reason for this is that you're likely to be moving unsecured debt such as credit cards into secured debt, which necessarily means you're potentially putting your home at risk. If you fail to keep to the repayments, you may find you'll enter into the nightmare of repossession and eviction, even if your debt is only a fraction of your home's value.

With unsecured debt, on the other hand, while the consequences of defaulting can be severe in terms of credit rating damage and even insolvency,

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your home won't normally be put at risk. Debt consolidation is therefore a risky move unless you're certain that it will in fact result in a sensible repayment figure that you can keep up with.

The other major risk of consolidation is that by clearing your current debts, and hopefully having a little extra spare cash each month, you might be tempted into using all those lovely empty credit card accounts to treat yourself after the worries and struggles of your recent financial hardships. This is, obviously, a terrible mistake - but it's one that it's all to easy to make.

In the worst cases, you could find yourself running up new unsecured debts which you need to service, all the while having the new secured consolidation debt hanging over you as well. To avoid this, it's absolutely essential that you cut up your plastic to stop you being tempted to use it, and also to contact the card issuers and tell them to close the accounts down to remove all possibility of running up new debt. If you need to use plastic for payment convenience, consider a secured (prepaid) card or a debit card instead.

None of this should discourage you from restructuring your finances with a consolidation loan if you can determine for sure that the benefits will ease your financial burden, but always bear in mind that consolidation has risks as well as rewards.

Martin is a personal finance writer working for Debt Sorter, where you can read more about debt consolidation and other ways of dealing with debt problems. Visit to get debt help today!

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