A debt reduction loan is sometimes also called a consolidation loan. It might just be the right solution to help you get out of debt if you use it the right way. However, if you use it the wrong way, you might just find it could land you in a lot more trouble than when you started.
How a Debt Reduction Loan Works
The idea behind a debt reduction loan is to roll all the balances of your high interest credit cards, store cards or other personal debts into one easy loan. You only have to think about finding the cash to repay one loan instead of worrying about keeping up with multiple repayments on all your old accounts.
In most cases, your consolidation loan will have a much lower interest rate than you were previously paying for your combined old debts. This usually means your repayments will be much lower every month as well. You?ll really notice the extra cash you have left over at the end of every month.
On the surface it really seems like a debt reduction loan can be a great idea. However, there are some things that could go very wrong if you?re not careful.
Getting Out of Debt with a Debt Reduction Loan
When your new lower repayments begin, you should notice an immediate difference in your repayments. Try to take advantage of your reduced repayments by putting paying more than the minimum repayment on your loan.
Paying more than the minimum will help reduce your balance more quickly, which helps get you out of debt faster. It also decreases the total amount of interest you pay over the loan term.
What Could Go Wrong with a Debt Reduction Loan?
Once you?ve consolidated your old credit cards, store cards or other consumer debts, you only have the one new loan to think about. This is great in theory, but what happens the next time you go to the mall?
Many people who have debt problems are so accustomed to buying whatever they want on credit that when a new bill arrives or a shopping trip tempts them with new treats to buy, their first instinct is to reach for the plastic.
If your cards are all paid off and closed, will you be tempted to go out and apply for a new credit card ?just for emergencies?? Statistics show that a large percentage of people who have consolidated old debts will end up with at least one new credit card within six months.
Not only will you have a consolidation loan to repay, but you?ll also have a new credit card balance to pay off too. Effectively this puts you back to square one or worse.
In order to make a debt reduction loan work for you, it?s important to address your spending habits so you won?t end up in the same situation again in the future. Avoid applying for more credit and make sure you put the savings you make on reduced repayments to good use.
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