Most people who try to get out of financial traps choose to consolidate debt. With credit card bills cleared, no more confusing multiple payments to multiple creditors, and just one loan payment every month, loan consolidation really is the way to being debt-free.
Or is it?
The Myth of Debt Consolidation and Financial Freedom
Some think that debt consolidation is the panacea to their financial troubles and that they have the freedom to spend as much money as they used to. This is because, in most cases, loan consolidation frees up a little bit of extra income, as it clears up credit card balances. It also solves two of the worst financial problems, including high interest rates and monthly payments on loans.
All these benefits of debt consolidation drive people to start abusing their credit cards again and take out another consolidation loan to pay things off. In the end, they end up unable to break the debt cycle.
Understand that debt consolidation is just a tool. Experts from Pioneer Finance say that financial freedom starts with addressing the real issues in your spending habits and knowing how you can best use the financial tools available.
Your Financial Strategy for Debt Consolidation
A popular financial option for managing debts is home debt consolidation. This loan involves using the equity in your property, where you can pay a much lower interest rate. It’s often an effective strategy because there’s always the risk of losing the property if you fail to make the payments.
One important aspect you have to consider in these loans is the term. The loan term may be as long as the remaining term of your mortgage. Because the loan will run for a longer period, regular payments will be smaller, giving you more spare cash.
This is where it becomes tricky. With a longer term, your loan will be much more expensive because of the interest charges over the period. To avoid this, you need to make as many and as big extra payments as possible. And remember what was discussed earlier? Yes, the right financial perspective. Just because you had smaller regular payments doesn’t mean you go large on spending.
Debt consolidation can be the solution to your financial troubles, if and only if you do it with the right attitude. With the right financial tool and the right financial habits, you will be able to break out of that debt cycle.