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Is Debt consolidation an option for you?
Debt consolidation isn’t for everyone. Having debt doesn’t necessarily translate to the need to consolidate your debts. You have to remember that debt consolidation means taking out one loan to pay for all the other debts.
You are actually taking out another loan. This means that debt consolidation isn’t a free pass to being debt free. It requires careful planning and assessment.
How do you know if debt consolidation is for you? You can’t go for debt consolidation just because you have to pay off some debts. Normally, debt consolidation is an option for people who consistently make overdue payments to their creditors.
If you keep missing the due date of your payments, you’ll have penalties piling up. More than that, late payments may make the interest of your credit cards increase. Now, late payments are not that big of a deal when you are paying only one debt. However, if you have overdue payments for two, three, four credit accounts, you may be head over heels in fines, penalties and interest rates.
If this is your case, consolidating your debts into one big loan may be helpful. There’s only one lump sum payment each month so you can anticipate the date and prepare for it.
Debt consolidation may also be an option for those who can only make the minimum payments for their debts. Making the minimum payment isn’t bad. However, it is also not advisable. If you want to eliminate debt quickly, you should be willing to pay higher than the minimum.
If you insist on paying the minimum, it may take years to pay off debts that are actually just a few thousand dollars. Moreover, if you are only paying the minimum on numerous debts, it may take you decades before you successfully eliminate all those debts.
People who consistently borrow money to pay for gas, food and other necessities should also consider debt consolidation. If you’re in so much debt that you have no choice but to borrow more money in order to buy daily necessities, then it may be time to reconsider your finances.
If you consolidate your debts, you’ll pay lower interest rates and because the terms may be extended, you’ll be able to pay smaller installments over a much longer period of time. Doing this can truly improve your financial situation. You just have to remember to be disciplined in meeting the payments.
Lastly, if debts eat at more than 20% of your monthly paycheck, you may consider debt consolidation. More so if the aside from the 20% on debts, you still have to pay your mortgage. If this is the case, then you are clearly spending too much of your money on the payments for your debts. Debt consolidation may allow you to get payment plans that will help your paycheck go farther.
Once you have considered all these reasons, sit down and do some math. Find out how much you are paying for each debt every month. Take note of the interest rates, fines and penalties. When you have calculated the amount of money you devote to debt payments, visit debt consolidation companies and start comparing their offers.
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