Friday, August 15, 2014

Dealing with debt and debt consolidation

Any form of credit is a debt of some sort, so unless you pay cash for everything then you have debts and almost everyone has some form of debt. It is only when you are unable to keep up with the payments that your debt becomes a problem. Debt can be useful in certain situations, but when you get into trouble it can become a huge source of stress and worry.

If you are in this situation you may notice some of the following in your life

  • Missed payments and letters from creditors
  • Borrowing money to pay bills and catch up with arrears
  • Paying whichever creditor is putting on most pressure
  • Making promises to pay unreasonable amounts
  • Broken promises and more pressure from creditors
  • Legal action

There are different forms of debt, including mortgages, loans, overdrafts, credit cards and hire purchase agreements. Some debts, for example, mortgages, are secured - this means that goods or property, usually your house, is used as security in case the debt is not paid. Check out other aspects of dealing with debt and debt consolidation.

Debt consolidation is used by individuals who wish to amalgamate existing mortgages and other short term debt into one new loan. It means a new loan at a lower repayment than the combined loans that are being consolidated. If you assemble all your expensive credit card debt and personal loans into your mortgage, you will be able to pay off these loans using the much lower interest rate.

The danger in debt consolidation is that, despite the lower rate of interest on the consolidated loan, you can end up paying more because the new loan lasts much longer than the original loans. It is also important that you change the habits that got you in this position and stick to your new single debt repayment, too many people actually start borrowing short term again and wind up in the same position a number of years later.

For instance, a typical car or personal loan is repaid over a three to five-year period. If you consolidate this into a 20-year mortgage, the longer term means that although your monthly repayments are lower, you will pay far more in interest over the life of the loan.