It doesn’t take very long in life to realize that getting out of debt is much more difficult than getting into debt. And it’s all the more challenging when you find yourself with large credit card balances charging high interest rates. It can feel downright suffocating to know it could take more than a decade to pay off. That’s why an increasing number of people are turning to debt consolidation as a solution. But is debt consolidation the right move for you?
The idea of debt consolidation can be appealing to those who feel boxed in by mounting debt taking over their finances. Instead of making multiple payments for various debts, borrowers can reduce them to just one by consolidating their debts into one loan.
One solution is to ask a lender for a debt consolidation loan to pay off all your debts. If you qualify, the lender will collect all your debt information and pay off the balances directly. You then make one monthly debt payment to the lender. Your total debt still exists under one loan, and if you can secure a loan rate lower than the average of your previous debts, your monthly debt outlay could be less.
When Debt Consolidation Might Make Sense
While this strategy may not be appropriate for everyone, it can be advantageous to those with all or some of the following parameters:
You’re making multiple monthly debt payments:
The idea of converting numerous debt payments into one can make you feel less stressed and more organized financially. If your cash flow improves, you can pay more towards the debt, reducing your interest costs over time.
You’re paying high interest rates on your balances:
High interest rates make it difficult to pay down your debt, especially if you’re only able to make minimum monthly payments. That’s because your minimum payment mainly goes toward interest. If you’re able to obtain more favorable terms on a consolidation loan, more of your monthly payment will go towards interest and principal, which will pay it down faster.
You have good credit:
If you have poor credit, you may not qualify for a lower rate on your loan, which could offset any advantages of a consolidation loan. With a good credit score, you can qualify for a loan with lower rates, reducing your interest costs.
You are committed to staying out of debt:
Debt consolidation can help you alleviate the pressure of high debt, but it doesn’t address the root cause. Your debt cycle will continue if you fall back into the bad habits of overspending and not managing your money. Debt consolidation can only work with a commitment to a spending plan that keeps you within your budget.
If You Have Credit Problems
If your credit is less than good, ruling out the possibility of qualifying for a lower interest loan, your best option may be to work with a credit counseling agency. These non-profit counselors are authorized to work with most credit card issuers and other lenders to negotiate lower interest rates. After negotiating the lowest possible rates with all your lenders, they will consolidate your debt so that you make one monthly payment to the agency, and the agency pays each of the lenders.
The counselors will also work with you on budgeting and setting up a system of accountability that will get you on track to paying off your debt. Sometimes it will be noted on your credit report that you are working with a credit counselor, but as long as you keep on the plan, most lenders will view it as a positive.
A debt consolidation strategy that works should result in lowering your total debt payment, which will free up your cash flow. That extra cash flow should be applied to paying down your debt and building up an emergency fund when possible.
