Plan your debt consolidation carefully for real debt reduction

A man with his fingers on his temple, looking at a paper and stressed over debt.

To save on interest and get out of debt faster, debt consolidation takes careful planning. (Photo: Thinkstock)

Debt Consolidation loans could be a good way to simplify your debt. But it’s only the first step on your way to debt relief. Without changing your spending habits, a consolidation loan will only borrow your way away from debt, which makes no sense. Bundling all your debt into one payment makes sense, as it lowers your rate of interest. But if the only reason for the lower interest rate is a longer term, you could end up paying a lot more money in the long run.

Real debt reduction takes preparing

To save on interest and get out of debt faster, debt consolidation takes careful planning. Numerous debt consolidation calculators are available for free online. You can consider all the factors that will show whether or not consolidation makes sense with one of these calculators. Use an online debt consolidation calculator to research through different interest, payment and term scenarios to develop a plan of action.

Some of the best debt consolidation moves

Some debt consolidation approaches are better than others. At MSN MoneyCentral, M.P. Dunleavy offers some of the stronger debt consolidation methods. Consider a home equity loan for those who have equity in their homes. Home equity loan interest rates are low (high single digits) and the money you pay in interest is tax deductible. Refinance your car, if it has a secured loan, and use the additional cash to pay off debt. A personel loan to pay down credit card debt is a great choice, with less interest than you are paying to the credit card company.

Debt reduction snowball theory

When it comes to debt consolidation, many financial advisors believe that for real debt reduction, you have to formulate a plan to settle each debt separately. Dave Ramsey, a financial advisor, likes what he calls the “snowball approach.” With the snowball approach, debts are paid off one at a time, from the smallest to the largest. Ramsey advocates listing your debts in order. Start with the smallest debt as the first priority. The snowball can give you some success fairly easily knocking off the easier debts and motivate you to continue with the larger debts. The debt snowball works for dealing with debt, but it takes a lot of financial discipline, budgeting and saving money.

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