What is Debt Consolidation?
Debt consolidation is when you pay off existing debts with a new, single debt source such as a personal loan or balance transfer to a credit card, etc. By consolidating your debt, you pay off existing debts in full and focus on paying the debt back in installments (usually a monthly fee). Debt consolidation may help you save money, make the debt more manageable, and start you on your way to becoming debt-free. Read more about how debt consolidation works.
When Should You Consolidate Debt?
When loan amounts and interest rates seem to be increasing, individuals may begin considering ways to make their debt payments more manageable. Debt consolidation loans are an effective way to help those in debt manage multiple loan balances. Those considering this form of personal loan, but not sure how debt consolidation works may ask the question “Is debt consolidation a good idea?”
Debt is something that may work in a borrower’s favor or make life more complicated. Many of our larger, more important acquisitions may be made using debt as a tool. Whether it be a home, a car, or a business, many of these investments may not be possible without using debt.
Debt only becomes burdensome when we are unable to manage it. With the freedom that debt gives us to make large purchases and the nature of compounding interest, falling into large amounts of debt may become a risk for those without a plan for managing it. Here are ways for those considering a debt consolidation loan to determine whether or not debt consolidation is a good idea.
Debt Consolidation Has Many Advantages
For those considering debt consolidation, here are three reasons why debt consolidation is a good idea.
- When part of a disciplined plan, debt consolidation is a great method for paying off debt faster.
- Consolidating your debt and making consistent payments may boost your credit score.
- Paying a single bill rather than multiple bills with varying interest rates each month.
When is the Right Time to Consolidate Debt?
Having less debt is much more desirable than having more debt. For those looking to pay down debt, a debt consolidation loan is a great idea. Still, when to consolidate debt is a question many borrowers may have. Here are some examples of when you should consolidate debt.
When You’ve Made A Plan for How You’ll Pay Your Debt
If you’re serious about paying off your debt, you’ll have a plan of action for doing so. This plan will help you curb your spending and allocate payments to your debt. Paying off debt isn’t just simply applying for a debt consolidation loan and rolling all of your balances onto that loan. A set plan for how you’ll pay that debt off each year until the loan is fully vested is essential to paying down debt.
Your plan for paying down your debt may even include taking on part-time or freelance work to earn extra money to pay down your loan balances. The key is to have a plan and stick with it.
When You Have Your Spending Under Control
Individuals looking to pay off debt must have their spending under control. Obtaining a debt consolidation loan only accomplishes the transfer of loan balances to another loan. Making payments towards a debt consolidation loan balance may be fruitless if spending only adds more debt. Read more about ways to manage your debt.
If you’re still spending money uncontrollably, you’re only adding more to the debt that you wish to pay off. Once you begin to control your spending, paying down loan balances may be easier to accomplish.
When Your Credit Score Is Still High Enough to Qualify for Lower Rates
When applying for a debt consolidation loan, it is important to obtain a lower interest rate. In some instances, the amount of debt an individual has may be large enough to negatively impact their credit score and make it harder to obtain a lower interest rate. In this case, it may be possible that the interest rate for the debt consolidation loan may not be less than the interest rates on the existing loan balances. Having a high credit score may enable a borrower to obtain lower interest rates and make paying a debt consolidation loan balance.