Personal finance is challenging, and there is perhaps no more challenging aspect than learning how to handle debt. It can seem as though there is no way out once you get yourself into debt, and a lot of people ultimately end up further behind than when they first began their financial journey. That is why you need to focus on the core skills necessary to knock out debt and start making progress on your financial journey.
What Is Debt Consolidation?
This is the practice of taking multiple debts and rolling them up into a single payment that you make to one source. It is useful to do this for two reasons. The first is because you can potentially lower the interest rate that you pay on your debts, and the second is because you won’t have to make so many payments to different creditors all the time. Both things are important, and you need to recognize that you can stand to gain quite a bit by having a debt consolidationplan in hand and using it.
Here is the sequence of steps to take if you are considering debt consolidation:
- Run a tabulation of your current debts and their interest rates to see where you stand right now
- Look at the various offers on the table that you could qualify for
- Check with all potential lenders to see where the best rates are and if you qualify for them
- Compare the rates that you can receive from those creditors with the current interest rates you are paying now
- If you can lower your interest rate compared to what you were paying before, then go for it
It is critical that you read all of the terms and conditions that come with your new loan. It is most likely the case that it is a better deal for you if you are getting a lower interest rate, but you will want to verify that this is the case by checking over every aspect of the terms and conditions to make sure this is true. If there is something in there that you don’t like, you can always wait for another opportunity to present itself instead.
Use A Debt Consolidation Calculator
The only way to know for certain if debt consolidation makes sense for your particular situation is to use a debt consolidation calculator. This is the easiest way to see how the debts you have now stack up against what you could get if you were to use a debt consolidation loan. It is fairly straightforward for you to plug in the numbers and see what is going on with your current situation. You just have to get in there and make it happen. What you will likely find is that debt consolidation does make sense in the vast majority of cases, but you need to know for sure before you pull the trigger on that loan.
One thing to keep in mind is that you may see a hit to your credit score, at least temporarily, because you have technically drawn out more debt when you took on this loan. That said, it will be well worth it because you will eliminate the other debts that you have, and that should raise your credit score overall. You have to look at it like this to see why you should even borrow the money, to begin with. Think about the big picture, and you will see why debt consolidation could make sense for you.
When Does Debt Consolidation Make Sense?
There are times when debt consolidation is clearly your best move, and there are times when it doesn’t make as much sense. What you need to ask yourself in order to figure out the difference is why you are making this debt consolidation move in the first place. Nerdwallet.comgives a scenario when debt consolidation makes perfect financial sense and is the right move to make:
Here’s a scenario when consolidation makes sense: Say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You might qualify for an unsecured debt consolidation loan at 7% — a significantly lower interest rate.
This is precisely the time when you want to step up and take out a loan with a lower interest rate. It is a great move financially, and you will probably get yourself out of debt more rapidly by going with this option. Just understand that you will need to have a good credit score to pull this off. If your credit score is too low, then the only type of loan you will be offered is one with an interest rate that is far too high to do you any good. You cannot afford to take that risk, and therefore, you should avoid taking out these types of loans.
But if you need to get an emergency loan, you can use the equity that you have in your vehicle, you can find the nearest title loan, but make sure you choose one that has the lowest rate.
Why Debt Consolidation Won’t Solve All Of Your Problems
Most people who take out a debt consolidation loan breathe a big sigh of relief as they feel that their money problems are now behind them and they can move forward with life. However, it is important to understand that debt consolidation is not the end-all of debt solutions. It is a great first step, but there are other factors that determine if someone is going to have a healthy financial future or not. One of those factors is how they control themselves going forward. In other words, do they continue with their overspending habits or do they move forward in a more productive and financially healthy manner?
Personal finance is truly personal. Much of what one does with their money boils down to how well they are able to control their impulses and make progress working on themselves. It is certainly not easy to do, but we are all called upon to make this happen if we are to make the kind of progress that we need to make in our financial lives. Debt consolidation is simply meant to be used as a tool along the road….
