Debt Consolidation: Is It Worth It?

Debt Consolidation, is it worth it? 

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Are you thinking about debt consolidation? First you must understand exactly how it works and if it will benefit you. Debt consolidation means that your debts, whether credit card bills or other loan payments, are rolled into one monthly payment. If you have several accounts, consolidating them may be a way to simplify or lower your payments. Beware, there are several things you need to consider before diving right in. 

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Debt consolidation is usually a good idea for borrowers who have several high-interest loans. Whether it be credit cards, student loans, or personal loans.  However, it may only be feasible if your credit score is decent. If your credit score isn’t high enough to qualify for a lower interest rate, it may not make sense to consolidate your debts. You may also want to think twice about debt consolidation if you haven’t addressed the underlying problems that led to your current debts, like overspending. Paying off multiple credit cards with a debt consolidation loan is not an excuse to run up the balances again, and it can lead to more substantial financial issues down the line.

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There are plenty of pros to consolidate but there are just as many cons. 

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Some pros include:

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Streamlining your finances: Combining all your debts into one easy payment saves up time and the chances of missing a payment. 

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Reduce your monthly payment: When consolidating debt, your overall monthly payment is likely to decrease because future payments are spread out over a new and, perhaps extended, loan term.

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Pay off debt faster: If you consolidate your debt, say into a 5-year term loan. You have that sense of relief knowing that you will be debt free in 5 years. (Of course, that can backfire if you add additional debt to your load.) 

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Some cons include: 

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It doesn’t solve any underlying financial issues: This may be the most important one to consider! You can find yourself in deeper debt if you don’t curb your spending and work on the problems that got you into debt in the first place. If you are overwhelmed by debt, you may need financial coaching to help get to the root of the issues at hand. 

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You could end up paying more interest over time. If your credit score isn’t high enough to access the most competitive rates, you may be stuck with a rate that’s higher than on your current debts. This may mean paying origination fees, plus more in interest over the life of the loan.

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It may encourage additional spending: Having that one payment every month could give the illusion of having more money than you do. It’s easy to fall into the trap of paying off your debts, only to find they’ve climbed back up again. 

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Ok, so you’ve considered all the pros and cons and you are ready! Follow these steps below to get started and moving in the right direction.

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1. Look at your budget, if you don’t have one, make sure you start there. It’s extremely difficult to make a solid plan of paying off debt when you have no idea what is coming in and what is going out. 
2. Make sure your significant other is on board. If you are in a relationship with finances combined, both parties need to be involved and committed to the debt repayment process. If can be a daunting experience if only one person is ready to change. 
3. Review all your monthly minimum payments and the expected length of time to repay the debt and compare that to the time and expenses associated with a consolidation loan. If you’d like to see how a debt consolidation loan could affect your finances, there are plenty of debt consolidation calculators online.  Click here to start: https://www.creditkarma.com/calculators/credit-cards/debt-repayment
4. Consider all options, a balance transfer could work best for your situation. If it is just credit cards you are looking to combine into one easy payment, a new credit card with a 0% interest rate could do the trick. A debt consolidation loan may be better if you have several different types of debt. 
5. If you’re a homeowner, you may be able to take out a loan or line of credit on the equity in your home and use it to pay off your credit cards or other debts. But I would be cautious taking this route. If you are not disciplined, this can get you into deep trouble. 
6. Don’t be afraid to ask for help. There is a ton of support out there. Maybe you have a friend or a family member who is financially savvy and living debt free, reach out to them and ask for advice.

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The bottom line is, while debt consolidation can be an attractive option, remember there are benefits and drawbacks to taking this step. It can seem like a no-brainer to streamline your monthly payments into one single payment while lowering your interest rate, but it won’t solve your financial problems. It takes extreme discipline and motivation to get out of debt. It’s not easy, but it is achievable.

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A financial coach could help you every step of the way. Call, text, or email for a free consultation today and make that first step to be free. 

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“To change your life, you have to change yourself. To change yourself, you have to change your mindset.”

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