While debt is never ideal, many of us find ourselves in that situation at one point or another in our lives. You may have heard of the term debt consolidation floating around and if this has sparked your interest, it’s important to know all of the details surrounding it starting with what it is. In short, it is a process that allows you to combine all of your unsecured debts into a single monthly payment so that you’re no longer paying multiple bills with different due dates each month. This is done through a loan, which is used to pay off your existing debts and you are then responsible for paying off the new consolidated loan.
There are different methods that can be used for debt consolidation, including a home equity loan or a loan from a bank. Regardless of which method you choose, it’s very important to understand that consolidating your debt does not reduce it in any way. It may feel as though a weight has been lifted off your shoulders but the amount of debt you’re in is the exact same as it was before you combined it all together into a single payment. Debt consolidation isn’t a quick fix, and it won’t solve all your financial problems. When you consolidate debt, you’re not really paying it off. Instead, you’re just moving it around in a way that makes it easier to pay.
As with everything else, there are pros and cons to debt consolidation and it’s crucial that you consider both sides to determine whether or not this option is right for you. It’s worth considering if the final consolidated debt has a lower monthly payment than what you were paying before or if it has a lower interest rate because only in these cases would it be beneficial. If the payments and rates are higher, it doesn’t really make sense to proceed this way. You should also consider that while lower monthly payments or interest rates are great, it normally comes with a longer repayment period, so you have to make sure that you’re comfortable with this and see whether or not it is a good idea because you may be paying more interest on your debt this way and it may be possible to pay off your debts faster if you leave them unconsolidated.
It can be a good option, but you need to address the reasons why you got into so much debt in the first place. If you don’t change your spending habits, then consolidating debt is only going to be a short-term fix.
Before you consolidate debt, weigh all the options available to you. Understand the risks associated with your debt consolidation method. Finally, make sure you repay the loans you take out to consolidate debt.