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An Important Lesson in Debt Consolidation Loans

29 January 2013

Debt consolidation loans can be a great option if you find yourself buried underneath debt, with seemingly no way of ever getting out from under the pile. But just like with everything else, there are some do’s and don’ts that go along with these loans. One of the biggest don’ts is to avoid personal loans through private companies that will still charge high interest rates. One of the biggest do’s is to take out a debt consolidation loan against your home, and reap paying off your debt  in one fell swoop with low interest rates.

But there’s another do and don’t that come into play when talking about any kind of debt consolidation – and they both fall within the realm of self-discipline.

Debt consolidation loans don’t really do much good when, after you’ve used it to pay off all that debt, you just get yourself right back into the same position again – racking up debt much faster than you can pay it off.

And unfortunately, this is the situation that many Canadians find themselves in after taking out a debt consolidation loan.

If they’ve paid off their credit card debt, they soon have those balances back up to their max. And if they’re borrowing against their home through a HELOC, they continue to spend on that line of credit long after their debt has been paid off. They’re now simply forming new debt.

The problem, some experts say, is that debt consolidation loans provide “an easy way out,” and so borrowers don’t actually learn their lesson about only spending what they can afford, and living within their means. If on the other hand, those same borrowers were forced to stick it out, pay off each high-interest debt little by little, and sacrifice much in the meantime, they’d be less likely to get that debt up so high after they’ve finally paid it all off.

So, what’s the lesson?

Simply to be self-disciplined when taking out any kind of debt consolidation loan. If you’ve paid off your credit cards, cut them up as soon as you do. And if you’ve taken out a HELOC, start reducing its balance, and available credit, as you continue to pay it down.

Debt consolidation loans can be great financial tools that can help you get out of a mess somewhat quickly. However, they’re only tools. And just like any other kind of tool, if you don’t know how to use it properly, you could end up inflicting real damage to yourself.

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