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You may have seen it on television and heard it on radio — people who are out of money have rolled all their debts, including credit card debts, into one, have gotten interest payments reduced, and apparently have restored some order into their finances.

The loan packages that make these possible are called debt consolidation loans and they do provide some manoeuvring room if your loans are no longer controllable, and you need to rein them in.

Credit card debt consolidation loans may seem to make it quick and easy to wipe out your existing credit card and personal loans debts and get in control of your spending. But keep in mind that there are risks involved in taking out debt consolidation loans. You are simply converting several short term credit cards debts into one longer one.

Your Options
You have two options in getting debt consolidation loans: personal loans and home loans. If you are keen on personal loans, you may want to explore possibilities with your existing lender first. You’ll need to present a well-prepared budget and a realistic schedule of repayment. This way, you have better chances of convincing your lender to provide the debt consolidation loans you need.

If you have built up sufficient equity in your home, you may want to choose the home loan option. In this case, you can arrange to convert some of the excess equity to cash to help you pay your higher-interest credit card debts. By tapping your home equity, you gain a longer period within which to pay off other debts — if need be, for a term as long as your home loan. The result: lower monthly repayments and an easier cash flow.

The Risks
If you will only be paying the minimum amount on debt consolidation loans, the total interest you will pay over the life of the loan dramatically increases. Getting the loan itself is not cheap as there are application fees and other charges that lenders will levy on debt consolidation loans.

If you are not financially secure then you could be putting yourself at further risk using your home equity. You would not want to lose your home, so make sure to stick very strictly to your repayment scheme.

It is extremely important to realise one thing: your spending behaviour is your most dangerous adversary. For example, debt consolidation loans might allow you to pay off credit card debt on three credit cards amounting to $10,000 — which helps you because of the reduced interest burden. But you now have three credit cards with available credit limits you can access in full. It’s very easy to be tempted. With the debts cleared on your cards you could quickly forget you still have the $10,000 debt to pay off.

Don’t get yourself into a debt consolidation loan unless you are serious about changing your spending habits by paying off your debts and avoiding new debts. A good way to minimise the temptation to use your credit card will be to cancel all but one of the cards. For the remaining card choose the one with the lowest interest rates and fees and ask the issuer to lower the limit to a level you can pay off in full each month.

Sit down and plot out your monthly income and all your outgoings with special note on where your outgoings are being spent. The objective should be to cut discretionary expenses down to the minimum and to use the available cash for loan repayments. Remember, self-discipline is the key to make debt consolidation loans work.

Article by Richard Greenwood from click4credit.com.au which allows consumers to compare personal loans online.

Technorati Tags: Credit Card Debt, credit cards, debt consolidation loans

Tags: Credit Card Debt, credit cards, debt consolidation loans

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