How to Know When Debt Consolidation is WorthwhileJuly 28, 2022
Sick and tired of being sick and tired of being in debt, you’ve decided to eliminate it from your life once and for all. Consolidation sounds like it might be a good idea, but you’re having trouble with the notion of taking on more debt to eliminate debt.
It just sounds—backwards.
However, it does work, under the right circumstances.
Here’s how to know when debt consolidation is worthwhile.
What is Debt Consolidation?
In the simplest terms, debt consolidation is the process of bundling as much of your existing debt as possible into one loan. You’ll then repay this loan—ideally at a lower rate of interest and with a lower monthly payment—sooner than if you’d let the debt you consolidated go to term.
This also leaves you with but one obligation to meet each month, which can be far easier to manage than keeping track of multiple bills.
The key to making debt consolidation work in your favor is your credit score. You’ll need a good to excellent score to get an interest rate capable of lowering your monthly payment and shortening your overall loan term.
You can learn more about how debt consolidation works at www.FreedomDebtRelief.com.
Debt Consolidation Methods
Zero percent interest balance transfer credit cards: You may have been the recipient of various credit card offers touting a 0% interest rate on balance transfers. Credit card issuers who are willing to purchase your debt from your existing creditors are sending them. That 0% interest rate is usually for one year—sometimes two—which gives you a window within which to pay off your debts in full without accruing additional interest fees.
However, you have to make sure you can pay off the entire transferred amount within that timeframe. Otherwise you’ll get hit with a stratospheric interest rate. Some issuers will also impose interest charges on the entire transferred balance, going all the way back to the date you executed the transfer. There can be card fees to consider as well. Generally speaking, you’ll need a strong credit history to get one of these cards.
Debt consolidation loans: These unsecured personal loans are intended expressly for paying off debt. They are offered with no collateral requirement. However, you must have a very strong credit score to qualify.
While you’ll forgo the interest-free balance transfer window within which to satisfy your debts, you’ll enjoy a lower overall interest rate if the loan goes to term. Here again though, you’ll need really good credit to make one of these loans work in your favor.
Equity loans and lines of credit: Though similar in concept to the consolidation loans explained above, these have one significant difference. Equity loans and lines of credit are secured by pledging an interest in a property you own.
In other words, you must provide collateral to qualify for these loans. They typically come with a lower interest rate than personal loans, however they also have a pretty big “gotcha”. You’ll be forced to sell your property to satisfy the loan if you find yourself unable to meet the payment terms to which you agreed.
When Consolidation Makes Sense
The first thing to consider when contemplating a debt consolidation is your credit history. Again, the higher your credit score and the better your credit history, the more likely you are to benefit from this approach.
Yes, you can get consolidation loans with less than stellar credit, but the advantage starts to slip away when you have higher interest rates with which to contend. This is why it’s a good idea to seek consolidation at the first signs of trouble—rather than waiting for the problem to manifest itself in a lower credit score.
The next thing to consider is your ability to repay the loan. While this is pertinent to each strategy, it is of particular importance with the balance transfer card and the equity options. You must pay off the transferred amount before that zero percent deal expires to derive the greatest advantage from a balance transfer. Meanwhile, failing to meet the terms of an equity-based consolidation could mean the loss of your home.
The other factor to look at is how the debt accrued in the first place. What happened to land you in so much debt? Was it a situation beyond your control, or was it just an affinity for spending? Whatever the cause, you must make sure you can prevent it form happening again, particularly while you’re repaying the consolidation loan. Otherwise, you could find yourself in more trouble than you were before you took the consolidation loan.