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Debt Reduction Tips To Help Start Off Your New Year

When you look ahead to the coming year, are you filled with anticipation or worried about dealing with money troubles?

If you're feeling concerned about your financial stability, you might consider making debt reduction one of your top New Year's resolutions. Here are a few tips that may help you reduce your debt (and your money-related stress):

• Slash your credit-card debt. Figure out your balances and calculate a monthly payment that's greater than the minimum. Pay that amount on time every month. Meanwhile, as you're paying down your credit cards, use cash instead of plastic for your purchases.
• Take time to redefine your shopping habits. Make lists. Don't buy things on impulse. Consider buying items in bulk to cut costs.
• Start a savings account, or add funds regularly to your current savings. Sign up for your employer's 401(k) plan, or if you're self-employed, create your own savings goals. You should ballpark between 5 and 10 percent of your take-home pay as fodder for your savings account.

A debt consolidation loan may also be helpful as you work toward reaching your financial goals. Debt consolidation means uniting all your individual debts into a single debt and the loan taken in order to cover these individual loans under a single entity is known as a debt consolidation loan. These loans are usually secured against an asset that serves as collateral, so in case of default, the borrower agrees to allow a forced sale of that collateral in order to repay the loan. Collateralization reduces both a lender's risk and the interest rate on debt consolidation loans.

Debt consolidation allows borrowers to consolidate their individual bills into one low-interest account, while at the same time reducing the risk of late payments, since only one monthly payment must be made.

A debt consolidation loan is also particularly effective for those looking to reduce credit-card debt, since it allows borrowers to pay off all credit balances at once. This not only reduces a borrower's monthly payments, but also results in substantial savings on interest paid over the long term. Borrowers should keep in mind, however, that they'll be increasing their total repayment amount due to interest accumulation over the long term.

It's also important to remember that consolidation, while a helpful tool to consistently and effectively reduce debt, is not without its perils. Here's a list of pros and cons to keep in mind when considering a debt consolidation loan:

Pros:

• Debt consolidation simplifies the process of debt repayment by placing all individual debts under one account.
• Homeowners are especially well-suited to take advantage of debt consolidation by using the equity built up in their property.
• Borrowers with substantial credit-card balances may find consolidation a useful, low-interest means of managing debt.

Cons:

• Borrowers should watch out for loans that carry higher interest rates than they have on their current accounts. These loans may make for more manageable monthly payments, but higher interest rates could render them counterproductive.
• Credit cards that offer balance transfers are tempting, but borrowers should remember that those rates last only a few months — and then they need to start thinking about transferring balances once again. In addition, repeated balance transfers may reflect poorly on credit reports — not something you want if you're trying to clean up your debt.
• Using certain items such as a car as collateral on a consolidation loan could be risky, since the car could outlive its usefulness before the debt is repaid. Let the borrower beware: Collateralization means carefully considering what valuable item is most appropriate for securing the debt incurred.

A new year means new opportunities, and you don't have to stay in debt forever. If you're certain to carefully research and comparison-shop, a debt consolidation loan may be your ticket to a better financial picture in 2008.

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