Debt consolidation loans can be a helpful debt relief tool for some. These types of loans work by allowing you to bundle together all your debt into one single loan with fixed monthly payments. This is an attractive idea for those who are in constant fear of debt collectors knocking on their door at any moment or those who want a little extra time to pay off their debt more slowly.
However, it’s important that before taking out a debt consolidation loan, you learn about what this type of loan entails and how it might affect your financial situation even further.
In this article, we’ll discuss the basics of consolidating your debts.
How to Consolidate Your Debts
In debt consolidation, you combine your multiple debts into one. In general, there are two ways to do it:
Debt Consolidation Loans
You can use the loan to pay off your debt. Then repay it in equal monthly payments over a period of time. It’s possible to qualify for this type of loan even if your credit score is poor.
A debt consolidation loan is the most common method of debt relief among middle-class Americans, with more than one-third using this type of debt relief tool in a year.
Balance Transfer Credit Card
This is when you move debt from one credit card to another, which usually offers better terms and conditions on the debt that is transferred. The majority of balance transfer credit cards offer a promotional 0% annual percentage rate (APR) on balance transfers for a set period of time, usually between 12 and 20 months. For the most part, you will need excellent or good credit to qualify.
When debt consolidation is a good idea
Consider debt consolidation in these situations:
- Your payments are overwhelming. Consolidation can offer a solution to this problem by merging multiple payments into one, helping you to pay on time.
- When you have debt with a high-interest rate. In the case of high-interest debt, a consolidation is a good option because you can save money on interest by reducing the amount you pay.
- Repaying the loan is within your means. In order to benefit from a debt consolidation loan, you must be financially capable of repaying it. Your financial situation could become significantly worse if you are unable to do so.
When debt consolidation isn’t worth the effort
- When you have little debt. You can pay off your debt in less than a year, consolidation makes little sense. By consolidating you may not be able to save much money.
- You do not plan on changing your spending habits. Consolidating debt is not easy, and involves finding new ways of cutting expenses and giving up old spending habits. If you are not willing to commit, it might not be the right strategy for you to get out of debt.
- Your debts exceed half of your income. A debt management program or relief will be more helpful.
Debt consolidation can be a helpful personal finance tool and can get your financials back on track. If you’re disciplined and do your homework, you could save hundreds of dollars a year and improve your finances.
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