How to Decide If Debt Consolidation Is Right For You
Unlike how many see it, debt is a good thing. It offers people leverage and opportunities to do things that would otherwise be expensive. The problem, however, comes in when the debtor is unable to service the loan. Conflicts may arise, and the creditor may take drastic measures to secure their interests. However, before things get to this point, there are several moves the debtor can make to ease the pain. One such move is debt consolidation. This in a layman’s language, is paying off consumer debt through a new loan. It is usually larger and with better terms. Most people prefer to combine all their existing debts and take out one big loan for all of them.
When you consolidate debts like credit card debts, the cost is lower. The credit card loan increases with time due to interest. The sooner it is paid, the better. Multiple debts have different deadlines and terms, however, they can be stressful. When you consolidate, you are left with only one debt to worry about. The interest rate for consolidated loans is lower compared to others. You would be safer if you opted to consolidate debts like credit card debts. It is a good thing but not for everyone. There are several factors to consider before taking this route.
Can You Afford the Overall Interest Charges?
To pay existing debts, one is tempted to take up long-term debt. It has lower monthly payments but a higher overall interest. It looks cheap, but you will feel the pinch as you make the monthly payments for a more extended period.
Can You Avoid Charging Before Paying the Consolidation?
After consolidation, your credit cards will remain open. If you charge them, you will add on more debt even before paying off the consolidation. If this happens, you will have more debt than before.
Is the Interest Reduced Worth It?
The objective is to save on the payments. For this to happen, the consolidation loan needs to have lower interest rates than the existing debt.
Payment of debts like medical bills with a consolidation loan will not be wise. A medical bill has no interest rate, so it will cost more no matter how cheap the consolidation loan is.
Debt consolidation is cheap and a sought-after option for many. It suits many but not all, so weigh your options right. The objective is to reduce the overall debt. If the consolidation loan can’t offer that, then there is no sense in taking it.