Why is debt consolidation useful?

Debt consolidation

The concept behind debt consolidation is to take all your existing loans and group them together into a single loan that is a lot easier to manage.

It is not only about making sure that you don’t have to deal with five or six different lenders, but to lower your monthly payments and interest rates.

But finding the ideal short term loan for your circumstances is not easy. It is why there are many useful websites that you can check out that create best of 2020 lists to explain the different options available to you. These sites go over the pros and cons of different debt consolidation options.

How Does It Work?

There are two options available for individuals who want to consolidate their debt. The first is the best option, but it is usually only available to those who have very good credit. You could get a 0% interest credit card that offers balance transfers.

Such credit cards allow you to transfer a sum of money onto your card and maintain that 0% interest for anywhere from 6 to 18 months. It means that if you can pay off your debt within the time frame for 0% interest, then you do not have to worry about the interest on all your other debt obligations.

However, such an option is only there for people who have good to excellent credit scores. If you have a lower score, then you are very unlikely to get a credit card offer that has 0% APR, even for an introductory period.

A Single Debt Consolidation Loan

The solution for those who have lower credit is to go with a debt consolidation loan. It is a loan that you borrow from a new lender, which will allow you to pay all your existing debt obligations.

Say you owe $10,000 over many different loans. Now you would take out another loan for $10,000, pay off all those loans, and then focus on paying back the single loan. It allows you to not only group together your debt into a single package, but it usually comes with a lower interest rate.

When is it a Good Idea?

It is a great question to wonder whether it is always a good idea to consolidate your debt. The answer is no, as there are circumstances where your existing loans may be the best that you can do.

If you are someone who meets one or more of the following criteria, then you should think about consolidating your debt:

  1. Your total debt is not more than 40% of your gross income.
  2. You have good enough credit that you can get a debt consolidation loan with a low-ish interest rate.
  3. You have enough money to pay your monthly debt obligations for the new loan.
  4. You are not going to take on even more debt in the near future.

Let us say that you have a total of $10,000 in debts, and most of them are for credit cards or other financial instruments that came with very high interest. Now you have slightly better credit, and you want to consolidate your loans.

A new loan would be at a much lower interest rate, as you now have better credit. You would be able to get clear of that debt in a few years while paying less interest, compared to sticking with your existing loans.

Negotiating a Deal

The best thing that you can do in terms of debt consolidation is to negotiate the deal that is ideal for your circumstances. You must ensure that you are taking care to not take on a new loan that you will be unable to pay.

A debt consolidation does not wipe out your debt. It is merely a way to repackage the debt that you must pay back. It is why you have to take control of your finances.

Look at your books and decide whether you can pay back your debt. Will you have enough money to deal with your regular expenses, and keep up with your monthly debt payments?

If the answer is yes, then you can go ahead and negotiate a new loan. Talk with the debt consolidation company and explain your desires. Are you more interested in lowering your monthly payments, or in lowering your interest rate?

Another factor to remember in this entire process is that debt consolidation should not embolden you to take on more debt. The goal is to pay off what you owe. Do not take on more loans or credit cards unless you have made a significant debt in your present obligations.