January 16, 2020 What is Debt Consolidation and Should You Consider It?
Everyone has bills to pay, and some of us struggle more than others. If you feel like debt is consuming you, you aren’t alone. According to debt.org, the total U.S. consumer debt is now at $13.86 trillion, which includes mortgages, credit cards, student loans, and auto loans. Handling bills and debts can often feel like you’re just treading water from month to month. If that’s the case, debt consolidation could be right for you.
What is Debt Consolidation?
It might sound like a scary term, but it’s really not. Debt consolidation is a sensible financial solution to help consumers get out of credit card debt. Instead of paying a multitude of institutions various sums of money every month, consumers can merge their many bills into a single debt and pay one source. It’s an effective “light at the end of the tunnel” scenario that helps countless people reach financial freedom.
How Does Debt Consolidation Work?
Debt consolidation essentially allows you to take multiple loans with varying interest rates and terms and roll them into one simple loan. This means you will only need to make one payment every month, fixed at an affordable rate. Consumers will often choose to consolidate their debt through either a loan or a debt management program.
When Debt Consolidation is a Good Idea
If you feel like you’re treading water but have a plan to prevent falling into debt again, then debt consolidation can definitely work for you. Additionally, it can be beneficial if:
- Your total debt (excluding mortgage) doesn’t exceed 40% of your total income
- Your cash flow consistently goes toward your debts
- Your credit is high enough to qualify for a 0% credit card or a low-interest debt consolidation loan
Making the minimum payments on your debts can mean long months or years of working through the debt. With debt consolidation, you can give yourself a way to help you turn your financial life around for good.
When You Shouldn’t Consider Debt Consolidation
Unfortunately, this solution doesn’t act like a magic wand that will make all of your debt problems disappear. In order to determine if this step is right for you, you’ll need to ask yourself a few crucial questions:
- Are you willing to address your spending habits, create a monthly budget, and commit to it?
- Does taking out a new loan to pay off your debt make sense?
- Will you be able to make monthly payments on-time every single time to keep qualifying for the terms of your new loan?
- Do the fees and costs associated with this loan outweigh the debt you face now?
If you’re unable to say yes to each of these questions, then we suggest not taking this step.
Before Consolidating Your Debt…
Let’s say that debt consolidation is the right choice for you. Before you do anything else, it’s imperative that you come up with a solid, manageable plan to help you avoid going into debt again. If you don’t follow a budget, now is the time to create one and stick to it. You more than likely will also have to make significant lifestyle changes. Finally, remain focused on your goal. Review your statements, stay up to date with your progress, and don’t give up. You will get out of debt!
Still not sure if debt consolidation is for you? Call your friendly bank experts at Central Federal at (573) 364-1024. We can help navigate you toward the path toward a healthy financial life!