Consolidating your debt is when you combine all your debts into one. This seems like a great idea to most people, but is it the right decision for you?
It’s no secret that debt is a widespread and nefarious problem in America today. The average American now has $38,000 worth of debt, more than any other nationality in the world. There are many sources of debt that affect countless Americans. Between student loans, medical, credit card debt, there are so many ways that you can find yourself in debt and possibly upside down in regards to your finances. One increasingly popular option for debt reduction is debt consolidation.
Consolidating your debt is a process in which you combine almost all and all of your existing debts into one. It is essentially a process of taking out a single loan to pay off all of your creditors and then focus on dealing with only one debt obligation. However, while it might seem appealing, debt consolidation is not for every one. In fact for some people, it will not benefit them at all. Here are some questions that you should ask yourself and your financial planner when deciding.
1. What Kind of Debt Do You Have?
It is worth noting that consolidation is only an option for certain types of debt. Typically debt created through credit cards, medical expenses, banking overdraft, and other personal loans can be consolidated. If you have non-private student loan debt, this will not be able to benefit from consolidation. Mortgage debt will also likely be unaffected by any consolidation options. Always take a look at your finance and debt situation and discuss with a trusted financial planner to see whether consolidation or not will actually help you.
2. Will Consolidating Your Debt Save You Money?
One of the main reasons that people consolidate debt is to save money. Typically, a major benefit of debt consolidation is that you can swap all of your loans for one with a lower interest rate. This can save you thousands of dollars or more over the course of your lifetime. However, this is not the full story. In some cases, consolidating debt might mean you pay more money. Even if there is a lower interest rate, the amount you pay over an extended period in interest could be higher. You can learn more options about debt consolidation from the experts to figure out whether doing so will actually save you money.
3. Do You Want More Time to Pay Your Debts?
Sometimes, the cost is not the only consideration. Many people choose to consolidate their debts because it gives them more time and space to breathe. By consolidating all of your debts and reducing the overall payment, you can extend the overall loan payment by years. While doing so can mean that you end up paying more over time in interest, it also gives you some precious wiggle room with your day-to-day finances.
4. Can You Be Trusted Not To Take on More Debt?
Finally, it is important to add that debt consolidation should only be considered if you are confident that you are in a position where you will not be taking on more debt. If you consolidate your loans and then continue to max out your available credit, the consequences could be catastrophic. You could end up losing assets that you put up as collateral or surrendering equity. You could destroy your credit score completely. Use debt consolidation as a second chance to get on solid financial footing, but if you anticipate taking on more debt afterwards — this might not be the best option for you.