If you find yourself owing on several, high-interest loans, you may want to consider debt consolidation. Debt consolidation a process of combining several debt such as loans or credit card debt into one single debt (payment) to make it less stressful and much more manageable. The goal is to organize your debt into just one monthly payment with a lower interest rate. Debt consolidation can be a powerful tool to help you get out of debt, but we would only recommend it to people in the right situation. Consolidation of debt may be be considered if:
- Your total debt is not more than 50% of your monthly income
- Your credit score is high enough to get a low-interest rate on a new loan
- You have a significant and reliable monthly income to cover the payments
The most important qualification that you need to meet before considering debt consolidation is that you are prepared for what comes next. You'll need to have a plan to prevent getting back into crippling debt.Consolidating only works properly if you can achieve financial responsibility going forward.
The most common situation in which people consider debt consolidation is for several, high-interest credit card debt. People have a tendency to overspend and use new credit cards to compensate for the deficit that is created by the first credit card payment. This can turn into a terrible situation for the individual and will undoubtedly end badly for them if not managed with care. It doesn’t take long to get into significant debt and be juggling 4-5 credit card payments a month. Not only will you be losing a ton of monthly income, your interest rate will prevent you from making any meaningful progress on getting the debt paid down.
Credit card interest usually ranges anywhere from 18%-25%. Having 2-5 of these debts at a time can be crippling to your income and it can feel like you are not making any progress because of the high interest rate. In this situation, we'd recommend getting one, lower interest loan that combines all of your credit card into one, more manageable debt. You may qualify for a debt consolidation loan for as low as 7% interest, which is a huge step down from standard credit card interest. This will allow for you to make progress on your loan, since the interest is much more manageable. It will also be easier to keep track of your payments, since there will only be one instead of multiple payment dates and deadlines to worry about.
Credit cards are not the only type of debt that you can consolidate. You can also consolidate personal loans, medical bills, and payday loans. Consolidating these operates on the same idea: combining multiple debts into one to achieve a better rate and more manageable payment. Consolidating debt properly can have a ripple effect that is felt throughout your entire financial life. It can help you save money, pay more on your mortgage, and escape all of your debt faster. It can also lead to early retirement and the ability to leave a significant estate to your children or loved ones.
If you meet the right conditions and your debt is getting in the way of your financial success, you should look into and consider debt consolidation to be a potential solution to getting your life and finances back on track!