See How Much You Can Save By Consolidating Your Debts
Should I consolidate my personal debt into a new loan?
If you are like many people who find themselves with too much debt, you may need to consider refinancing or consolidating your loans. You might find yourself in a predicament where no matter how hard you try, you just cannot cut expenses any further or earn more income. The only solution is to lower your monthly debt payments.
There are only three ways to lower monthly debt payments: reduce the principal amount, get a lower interest rate, and extend the payments over a longer term. These three principles are used in refinancing and debt consolidation. Let’s see how these work and then look at the advantages and disadvantages.
How Much Debt Can You Handle?
If you feel that you have too much debt, you are not alone. Most people have substantial debt; many have more than they can handle. However, debt is not all bad. Sometimes it makes sense to use borrowed money for investments. However, most folks are not using debt in that way; they are using it to make ordinary purchases of things they would probably be better off without, anyway. In our competitive society, spending has become a status symbol. This encourages people to spend more than they should — more than they have. Consequently, they run up tremendous debt.
While some debt is okay, too much debt is not. So, how do you know whether you have too much debt or not? First let’s look at the different kinds of debt we might incur.
Responsible Use Of Credit
While credit is very important to the economy, its abuse is harmful. Credit is extended with the faith that borrowers will repay the debt. Goods and services are provided on credit with the expectation that they will be paid for with money in the future. Credit makes commerce more convenient. When credit is abused, everyone loses. Credit abuse increases the cost of credit to everyone.
One should never use credit to purchase things for which one will not be able to pay in the future. Many impulse purchases are made on credit with little thought given to how the debt will be repaid in the future. If one calculated the true cost of goods bought on credit, one would have second thoughts about making the purchase in the first place. Here is an example: a new television flat-screen HDTV model retails for $5,000. If purchased on a credit card with a 12% annual percentage rate (APR) compounded daily, and with minimum monthly payments of $166 paid over three years, it winds up costing over $5,980. Is it worth almost $1,000 more to have it now (furthermore, the retail price in 3 years will probably drop)? That is like going into a store that advertised “SALE–ADD 20% TO EVERY PURCHASE.”