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The Folly of Debt Consolidation? – by Will Edwards


These days, the idea of debt consolidation is becoming increasingly popular and as a consequence, there are companies that specialise in it. Essentially, it involves taking out further credit to pay off your existing debt. You typically make one payment per month rather than a number of smaller payments. The idea can sound very appealing when you consider the promised benefits such as lower monthly repayments, making one single payment and having the ability to clear all of your existing debts at a stroke.

However, you should be very careful and ideally, seek specialised advice before you embark on what might seem to be such an appealing path. Firstly, lower repayments might mean that you would actually end up paying more in the long run to eliminate your debt. But even if you manage to secure a loan at a lower interest rate than you are currently paying, which is certainly possible, there are other potential difficulties.

Let’s face it, being in debt is no picnic. When you are in serious debt, you have to learn how to cut your outgoings and make all kinds of sacrifices to keep your head above water. So, it may come as a surprise to learn that the little bit of additional income that may become available to you, as a result of consolidation, could actually create further financial difficulty.

The temptation is to spend the money of course, and the absolute worse way to spend it is to incur further debt by falsely assuming that you can now afford to take out more credit. The real key to getting out of debt is to first recognise the reality that you have not managed to be sufficiently disciplined to manage your existing finances. The answer lies in creating an income surplus and then targeting each debt in turn. It is not a popular answer, but it is the right answer.

The truth is that anyone looking to consolidate debt is already in a very serious financial situation and trying to fix the situation, which is the natural inclination, does little to address the underlying cause – the basic problem which is the inability to live within your means. It really does not matter how much or how little you have coming in, if you have not mastered this basic principle of money management, your finances will never come right.

Conversely, if you can master the basic principles of money management, then it also does not matter how much or how little you have coming in, you will never have problems with money. If money is a problem for you, as a first step in the right direction, I suggest you read The Richest Man in Babylon.

Article courtesy of White Dove Books http://www.whitedovebooks.co.uk

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