Debt, and what to do about it
If you're in debt, then there are only two ways of getting out of it:
- Spend Less, and/or
- Earn More
This sounds simple, but it's important to remember. You will not reduce your debt by taking out more loans, or moving your credit card debt to your mortgage.
The problem with consolidation loans is that it's all too easy to think of the debt as cleared, and then continue to spend too much and build up new debt. A poll of users on the Motley Fool UK web site found that over 80% of people who took out a consolidation loan ended up increasing their debt by taking out additional credit.
Personally, I believe occasionally consolidation loans can work, but only after you've have your "light bulb" moment (eg, taken your head out of the sand and realised you owe too much), have worked out a new, realistic budget, and stuck to it for a while!
However, 9 times out of 10, snowballing is a more effective, and cheaper way of reducing debt. When you snowball debts, you concentrate on the debts with the highest APR, and systematically pay off each loan or credit card in APR order (high to low).
When working out a budget and snowballing your debts, I think it's sometimes important to treat yourself when you reach a milestone (eg, get your debt below £10,000, pay of your highest APR credit card etc.), however remember if you do that, that anything you spend is money which is not paying off your debt, and therefore costing you more! Because of that, I've created a "Treat calculator", which you can use to work out the real cost of any treats you buy yourself!
It's also important to remember if looking at loans is that it's not all about the APR. For example, a loan of £5000 at 6% over 20 years is going to cost you more that a loan for £2000 at 20% over 5 years. Low APR and a short a time as possible is the answer!
For more (and probably better!) advice about debt, you may find the following sites useful: