It is not uncommon for people to get over their heads when it comes to their
finances. If you’ve fallen behind on payments, are receiving notices from debt collectors or are worried about losing some of your personal property, taking action to secure your financial health is necessary.
Research showed that 60 percent of Americans feel some stress when
thinking about their personal finances. Constantly worrying about money is
not healthy, especially when there are simple steps that can alleviate some of those concerns.
One of those options is debt consolidation, which is the process of taking out a new loan and using those proceeds to pay off individual debts like credit cards, student loans and auto payments. But is debt consolidation the right step for your financial situation? Use this guide to find out more about the process.
It depends on your financial situation. If you have multiple areas of debt, each
with its own high interest rate, and you are falling behind in making
payments, debt consolidation could be a good step in helping you work
toward a total payoff. But if you have a small amount of debt and feel like you are on track toward paying it off, a debt consolidation doesn’t make sense.
Like most financial solutions, learning more about the process is critical. If
you’re wondering (how does debt consolidation work, the pros and cons) of
the loan must be considered before you make the leap. Some of the benefits
and drawbacks include:
Pros of debt consolidation
Simplification: Instead of juggling multiple bills, all with different due
dates and interest rates, you now have one loan to repay. This can help
avoid missed payments and give you a better idea of when you will clear
your debt.
Faster payoff: Repaying your debt through a loan means less interest
overall, giving you the opportunity to pay off your total faster.
Improved credit: While your credit will initially take a dip when the
consolidation loan occurs, it should improve over time as you make on-
time payments, which are a large component of your overall score.
Cons of debt consolidation
Up-front costs: In order to get a debt consolidation loan, you may have
to deal with additional costs that could include origination fees, balance
transfer fees and closing costs.
Higher interest: The interest rate of your consolidation loan in based in
part on your credit score. If that number is low, you may have higher
interest rates than on your separate debts.
False sense of security: If you have bad financial habits, debt
consolidation may get you out of the hole, but you should reassess your
budgeting and saving strategy so that you don’t fall back into debt./p>
If you decide to embark on debt consolidation, you should check your credit
score, research lenders and then apply for the loan. If you are approved, the
money is delivered to your checking account, and you can pay your creditors.
Then, you repay the loan in one, fixed monthly payment at the approved
interest rate. Research showed that the average debt consolidation loan was for almost $13,000.
(When is loan consolidation a good idea)? If you have solid credit, enough
cash flow to cover the new debt service, and a solid game plan for your
financial future.
The debt snowball strategy has become popular recently. This method says if
one lists all their debts in the order of amount owed and then begins to pay
the smallest debt, the next smallest, etc., then they will have more success in
eliminating all debt. The argument is that the confidence built by paying off
the smaller debts will snowball and help lead to paying the larger amounts.
If you have the discipline to practice this method, it can work. However, most
examples have those who choose the debt consolidation method paying
slightly less over a five-year period.
As we’ve noted, a personal loan is a lump sum payment you will repay in fixed
monthly installments. If you know the amount of money you need to borrow
to help consolidate your debts, this is the course of action.
A line of credit works more like a credit card and gives you some financial
flexibility, depending on how much you’ve been approved for. However, this isn’t ideal for debt consolidation as they have variable interest rates and require excellent credit scores.
You can have multiple loans, but many of the large lenders have explicit rules
and regulations around the timing and money involved. Another loan could
