5 things you should know about debt consolidation

Let's talk about debt!

A lot of people carry debt, and especially with the ongoing pandemic, many are juggling more bills than they can handle and struggling to pay them off. If you are carrying a lot of debt, it's time to take control and set yourself on a positive path to debt repayment. 

In this blog post, I'll share about debt consolidation and how it might improve your finances, so you can start planning your next dream vacation as soon as the world gets better.

1. What exactly is debt consolidation?

Debt consolidation refers to the act of taking out a new loan to pay off other liabilities and consumer debts.  [source]

A debt consolidation plan, therefore, helps you combine all your credit facilities (such as credit cards and personal loans) from different institutions into a single loan. You get to simplify your debt repayment process instead of struggling to keep track of the different loan types, interest rates, and due dates.

Debt consolidation can be carried out in two ways -- through debt consolidation loan or through the transfer of existing credit card debt to another credit card. 

2. A debt consolidation plan can potentially lower your overall interest rate.

Debt consolidation is a good idea if your debts have high interest rates. Taking out a new loan (with a lower interest rate) to pay all your debts at once can help your debt repayment scheme be more manageable, albeit much longer.

With a healthy credit score, you may find you can obtain a lower interest rate than you’re currently paying by consolidating your debt with a personal loan. This can help you spend less on interest and apply more money toward your principal. 

3. Debt consolidation can help you organize your debts.

Debt consolidation is also a wise strategy if you want to organize your debts into a manageable size. Multiple debts usually mean different due dates and interest rates, making monthly payments a hassle. When consolidated, however, you will only have one due date to remember. This will make it much easier to budget and automate your monthly payments.

This can also help you establish organized and manageable financial habits and take better control of your bills. For many borrowers, this sense of regained financial control can help them feel empowered and motivated to conquer their debt. It reinforces that they can maintain good financial habits and be more confident making financial decisions moving forward.

4. When is debt consolidation a not-so-good move?

Debt consolidation becomes a disadvantage when you think that it will free you from all your existing debts.  The debt is still existing. Just because these are rolled into a single payment, borrowers may start feeling free of debt, which may lead into getting another debt.

Second, debt consolidation loans usually come with fees, including loan setup fee, balance transfer fee, closing costs, and even annual fees. Know the charges that comes with your new loan if debt consolidation is a sound idea for you.

Lastly, a lower interest rate isn’t always a guarantee when you take a debt consolidation loan, which is technically a new loan. It will still depend on your lender, your regular income, credit score, and creditworthiness. Your monthly payments may even have a higher interest rate. 

5. When is it an excellent idea for debt consolidation?

Debt consolidation loans are an excellent idea only if you are:

  • Committed to clearing the debts as early as possible by making additional payments, along with the scheduled monthly payments.
  • You have a steady and sufficient income throughout the loan period to meet the monthly obligations.
  • You have multiple expensive loans to settle.
  • You have a clear strategy in setting the current loan and avoid any future loans.
  • You are capable of generating additional revenue to meet unexpected financial emergencies.

What’s next?

Do a bit of housekeeping of your finances. Find out how much you owe and how much it’s costing you every month. If you have substantial high-interest debts or struggle with making monthly repayments, a debt consolidation plan may be a good option to help you cope.

Review your financial plan and check your cash flow. 

Read more about debt consolidation resources, tools, and programs at DebtConsolidation.com.

Here are some resources that can help you: 

If you’re struggling with debt, don’t be afraid of reaching out for help. Being debt-free is too important to let shame or embarrassment get in the way.

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