Consolidate Your Debts - Key to Faster Repayment of Your Debts

If you are burdened by the repaying numerous loans you have taken, consolidating them into a single loan will ease a bit of financial pressure. However, there are some pitfalls associated with consolidating debts and certain rules must be adhered to. Failing to do so will only make the situation worse than better.

by Stuart Laing

In general, lower the loan amount greater is the rate of interest on the loan. Conversely, larger the loan amount, lesser the rate. So if you have many little loans, it makes sense to consolidate all of them into one large loan with lesser interest rate. But there are some hidden drawbacks which you should be aware that usually accompanies consolidating your loans.

First of all, you should always stay away from shadowy companies that primarily advertise on newspapers. Their interest rates are exorbitant and they are loan sharks in disguise. Always consult a lender with good reputation who will patiently explain both advantages and disadvantages associated with their program. But still, you should do thorough research and evaluate all the options available to you before committing to any one. Here are two basic rules that you should adhere to when consolidating your debts:

a) The money you borrow should never be greater than the loans you want to consolidate.

b) The tenure of your consolidation loan should never be greater than the tenure of your debts.

Any failure to adhere to these rules will make the road to bankruptcy closer to you. Firstly, make sure you have thoroughly and patiently gone through the loan terms to the last print. Different companies have different terms and there may be hidden bombshells you may not be aware of initially.

Financial Essentials

One thing you should be aware of is that the lenders will always coerce you to borrow more than what is required by you. Don't fall for it no matter how persuasive and credulous their talk is. They will show you how you can borrow larger amount of money, which can be put to use for other works, and still pay less. This old ploy is employed by most lenders to make gullible consumers borrow more money. What you don't realize is that you'll be repaying the debt over a longer period with low rate of interest. Don't be deceived by it.

Take the following scenario as an example. Let's assume you had 4 different loans of $2500 each for a period of 5 years at 18% APR. The amount that would cost you to repay these loans would be $246.73. You aim to consolidate these loans by borrowing $10000 at 8% APR for a period of 5 years, thereby paying $201.43 per month. This would now enable you to save around $45 per month!

Instead, having been persuaded by the lender you decide to borrow $15000 over 8 years at 10% APR at a cost of $224.20. You seem relieved to have saved $22.53 every month and at the same time have extra $5000 at your disposal quite unaware of the fact that you will be repaying the loan for an extra 3 years. The result of your decision will quite surprise you.

Rather than paying 60 x $246.73 = $14803.8 for your earlier debts, you'll now end up paying 96 x $224.20 = $21523.20. If you had decided to go for consolidating your loans with earlier intention 8% APR, you would have paid 60 x $201.43 = $12085.8. So instead of saving $2718, you will be shelling out extra $6719.40 to repay your debts! That is not smart decision. You have just breached the two rules mentioned earlier. You have borrowed more than what you required for a period longer than your current debts.

This is how these companies make profit by taking advantage of gullible consumers. Don't fall for them. In the long run, you'll end up only paying more than what you should be.

Before approaching any lender, decide beforehand the amount you need to borrow and the tenure, and adhere to it no matter how credulous their talk is. If they insist on giving what you don't need, it's time to go to the next lender.

Use the cited APR rates to figure out the best loan for you. In many countries, the law requires lenders to disclose APR rates on request. Other things like late payments fees, missed payments, should also be made clear before signing any documents.

Practical Essentials

Most lenders will require security or collateral, such as mortgage over your home, if the amount to be borrowed is quite large (usually above $2000), before offering you a loan to consolidate your debts. If you agree with the condition, any failure on your side to repay the loan will result in seizure of your home.

Before taking such a big decision and signing any documents, you must be very sure about your abilities to repay the loan and must be 100% dedicated.

Though consolidating your loans can speed up the debt repayment process, you must be aware of all the pitfalls associated. Make thorough research and evaluate all the options available to you before committing to any program. Any negligence from your part will thrust you in deeper waters than what you already are at present.

About the Author:

Stuart runs a website dedicated to helping people get out of debt. So if you want to improve your financial position, visit http://www.icanhelpyougetoutofdebt.com for free, impartial information on how to reduce debt.

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