For real debt reduction, plan your debt consolidation carefully

an eraser being appllied to the word "debt" on a piece of paper

Debt consolidation with careful planning to make sure you don't end up paying more in the long run can be a good strategy for debt relief. Flickr photo.

Debt Consolidation loans can be a good way to simplify your debt. But when it comes to debt relief, it’s only the first step. You have to change your spending habits as well, or you’re simply trying to borrow your way out of debt, which doesn’t make any sense no matter how you look at it. Debt consolidation makes sense if, by grouping all individual forms of debt into one place, the interest rate is lower. But if the only reason for the lower interest rate is a longer term, you could end up paying more money in the long run. In that case, you may be improving your cash flow, but debt reduction is a mirage.

Debt consolidation takes good planning

Debt consolidation takes careful planning to save on interest and get out of debt faster. Numerous free debt consolidation calculators are available online. A debt consolidation calculator helps you consider all the factors that determine whether it makes sense to consolidate. Use an online debt consolidation calculator to experiment with different interest, payment and term scenarios to develop a plan of action.

Good debt consolidation moves

Some debt consolidation approaches are better than others. M.P. Dunleavy at MSN moneycentral reports on some of the best debt consolidation moves. If you own a home and have some equity in it, consider taking out a home equity loan. A home equity loan carries a fairly low interest rate, currently in the high single digits, and the interest you do pay is tax-deductible. If your car has a secured loan, you can refinance it and use the extra cash to pay off debt. A personal loan can be a good option because the interest rate will be a lot less that what you’re paying to the credit card company.

The debt reduction snowball

When it comes to debt consolidation, many financial advisers believe that for real debt reduction, you need to formulate a plan to pay off each debt separately. Financial adviser Dave Ramsey likes what he calls the “snowball approach.” With the snowball approach, debs are paid off one at a time, from the smallest to the largest. Ramsey advocates listing your debts in order. The smallest balance should be your number one priority. The snowball can give you some success fairly quickly knocking off the easier debts and motivate you to continue with the larger debts. Ramsey said personal finance is 20 percent knowledge and 80 percent behavior.The debt snowball works for dealing with debt, but it takes a lot of financial discipline, budgeting and saving money.

Other recent posts by bryanh