You have probably heard the term debt consolidation, but do you know what it means, and is it even the right option for you? Debt consolidation is when you move either a higher interest debt, or multiple different debts into a singular new debt with a lower interest rate. This allows you to pay off multiple debts with a lower interest rate as one. When this is managed responsibly it can save you money on interest and help you pay off debt faster.
Debt consolidation is something that is advised for those who are, or intend to be, strict with their finances and budget. If you do not stick to a strict budget, you can run the risk of falling into more debt by seeing your new loan as an extension of debt rather than as moving your debt to save money.
So how do you consolidate your debt? You do this by getting a lower interest loan to transfer your outstanding debts to. You must be sure that the loan you are considering allows you to use it for debt consolidation, because not all loans allow you to do so. It is best to talk with a financial advisor to pick the best loan option for your needs and determine what you can qualify for. The most common options to consolidate debt are a personal loan or tapping into home equity. Talking with a financial advisor can not only help you find the best loan option, but it can also help you with creating a plan to achieve your goal of getting out of debt.
If you decide that debt consolidation is the best option for you, make sure to look for a loan with a lower interest rate. Working towards getting your credit score as high as possible can help get you the lowest interest rate you can qualify for. You might even consider having someone co-sign with you to help you lock in a lower rate, or you might need it to help you qualify for the loan.
The best place to start before applying for a loan is to build a budget. This allows you to know where you are spending your money and what you can cut out to create savings. It is important to do this before applying for any debt consolidation loan. You want to be sure you can afford the monthly payment amounts and you want to make sure you won’t allow yourself to accrue more debt in the process.
Debt consolidation is especially useful for those who have high interest debt, such as credit cards with interest in the double digits. It is also helpful for those who struggle with remembering to pay multiple debt payments on time. If you have many due dates for loans, it can be confusing and hard to remember which one gets paid when, which can lead to costly fees and interest for missed payments. For these debt situations it is best to consolidate your debt into one monthly, non-revolving, debt form.
The benefit of debt consolidation is that there is a set monthly payment and a set payoff date. This is beneficial for many people because it is not a debt amount that can grow or vary drastically from month to month. However, if you intend to do debt consolidation you need to either pay off your credit card completely each month, or you need to stop using your credit card all together. If using a credit card creates a monthly bill you can’t handle you need to stop using it for the time being.
This is important to stop yourself from falling further into debt. If you use the debt consolidation just to free up the credit limit on your credit card, it will just make it harder to get out of debt. It is important to be diligent with your debt payments after a debt consolidation to ensure the payoff date really is the date when you become debt free. It is helpful for many to use their debit card instead of a credit card to help them stick to their monthly budgets.
Debt consolidation and working towards becoming debt free is a large undertaking. However, when you finally get to that point when you are free of the debt that has been weighting you down it is a rewarding feeling. Best of luck during your journey towards becoming debt free!
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