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When is Debt Consolidation Not Appropriate?

For people trapped in a cycle of debt, debt consolidation is an appealing option. Debt consolidation is the process of taking all your debt (credit card balances, overdrafts, store cards and so on) and consolidating it into one low interest loan that gives you one easy manageable payment to meet monthly.

The benefit of debt consolidation is that it takes your multiple high interest debts and consolidates them into a single low interest loan. Debt consolation can be so beneficial that it is possible to halve interest liability immediately. Although debt consolidation is not always appropriate. Examples of situations in which it is not appropriate are:

  • If you have no self-discipline
  • If you're faced with an uncertain work future

Lack of self-discipline

Financial self discipline is crucial to good financial management. Many of us fall into a situation in which we spend far more money than we earn and have to borrow the rest, consequently getting us trapped further and further by debt. If this applies to you and you wish to consolidate your debts, it is important to remember that in order to make debt consolidation work you have to immediately change your financial habits.

To get the best results from debt consolidation you must:

  • Spend less than you earn.
  • Stop accumulating debt.

If you fail to do this, consolidating your debts will simply make your position worse.

Imagine that your have multiple debts worth $7,000, charging a collective interest rate of 20%. You could consolidate these debts into a loan with a 7% interest rate. This is an excellent way to improve your financial situation. However if you lack self-discipline and begin to use your credit cards again, debt consolidation may only make your situation worse. As a consequence of this you could end up repaying not only the debt consolidation loan but new credit card debts charging 20% interest. This situation could in effect double your debts and result in you continuing to pay high interest rates.

If you do not think that you are able to start developing good financial habits, debt consolidation is probably not a good option for you

Uncertain work future

If you have an uncertain work future or you can foresee that your income will be inconsistent then debt consolidation may not be your best option. Debt consolidation makes money management easier as it guarantees the amount of money you need to allocate to debt each month. However, this is only a benefit if you have a guaranteed income, if you have an uncertain work future debt consolidation may not be a benefit to you.

If you would like to find out more about debt consolidation and whether it would be appropriate in your situation then fill in the following form or call Debt Relief on 1300 781 034 and our staff will assist you in finding the most effective way to reduce your current debt.

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