What Is Debt Consolidation and Best Ways to Do It?
Debt consolidation combines several debt payments into one. If you are eligible for a low enough interest rate, it can be a wise decision.
Debt consolidation combines several debts into one payment, usually high-interest debt like credit card bills. If you can find a cheaper interest rate, debt consolidation can be a suitable option for you. This will enable you to consolidate and rearrange your debt to pay it off more quickly.
It is also a sensible strategy you can take on by yourself if you’re dealing with a reasonable quantity of debt and just want to reorganize several bills with varied interest rates, payments, and due dates.
Methods for Debt Consolidation
There are primarily two methods for debt consolidation, both of which combine your debt payments into a single monthly cost.
Get a credit card that lets you transfer balances at 0% interest and pay them off in full over the course of the promotional term. Do this for all of your debts. To qualify, you probably need credit that is strong or outstanding (690 or better).
Take out a fixed-rate loan for debt consolidation. Use the loan’s funds to settle your debt, then pay them back over the course of a certain time in installments. Although borrowers with better scores are likely to be eligible for the best rates, those with weak or fair credit (689 or below) can still apply for a loan.
A home equity loan or 401(k) loan are two other options for debt consolidation. These two possibilities, though, come with risk, either to your retirement or to your home. The ideal choice for you ultimately depends on your debt-to-income ratio, credit score, and profile.
Is Consolidating Debt a Wise Choice
The following are necessary for a consolidation strategy to be successful:
- Rent or mortgage payments together with other monthly debt obligations do not equal more than half of your gross monthly income.
- You can get a low-interest debt consolidation loan or a credit card with a 0% introductory rate if your credit is good enough.
- Your cash flow reliably meets your debt obligations.
- You have five years to pay off a consolidation loan if you pick that option.
A situation where consolidation makes sense is as follows: Let’s say you have four credit cards with APRs of 18.99% to 24.99%. Your credit is good because you consistently make your payments on time. You can be eligible for an unsecured debt consolidation loan with a 7% interest rate, which is a much lower rate.
Consolidation shows many individuals the light at the end of the tunnel. If you take out a loan with a three-year term, you know that, if you make your payments on time and control your expenditure, it will be paid off in three years. Making minimal payments on credit cards, on the other hand, could prolong the time it takes for you to pay off your debt and result in you paying more interest overall.
When Debt Consolidation Is Not a Good Idea
Debt difficulties cannot be solved by consolidation alone. It doesn’t deal with spending too much, which is what leads to debt in the first place. Additionally, it is not the answer if you are drowning in debt and cannot possibly pay it off, even with decreased payments.
If your debt burden is manageable and you would only save a modest amount by combining, don’t bother. You can pay it off at your current pace in six months to a year.
You would be better off seeking debt relief than staying the same if your total debts were less than half of your income. Contact Your Part Time Accountant to find out more on this topic.