Maintaining multiple credit lines while managing various interest rates can be taxing and ultimately detrimental to financial health. Thankfully, debt consolidation provides a solution by combining outstanding debt into a single loan with a manageable monthly payment.
Debt consolidation is exceptionally helpful because it can remove the stress of juggling multiple credit cards, student loans, and other private financial obligations.
There are a few primary methods of consolidating debt, but two of the most prominent are personal loans and 0% balance transfer credit cards.
Today we will discuss how debt consolidation works and whether or not it makes financial sense to combine different credit cards and loans.
How Debt Consolidation Works
Borrowers with high-interest credit cards end loans with balances that continue to grow, can combine all of that debt into a single, lower interest loan or balance transfer credit card, save money on high-interest rates, and have a set pay off date for the entire balance.
Reasons to Consider Debt Consolidation
1. Significantly Cut Interest Expense
Interest expenses can quickly get out of hand, especially with high-interest credit cards that routinely carry over 20% interest rates. Since credit cards are revolving credit lines, their balances keep increasing, even as payments are made. If the balance is high enough paired with a high-interest rate, minimum payments may not lower the balance at all if the monthly interest charges are higher than the payment.
When these balances are consolidated, the average interest rate drops significantly, and the balance will become fixed instead of revolving; ultimately reducing the total interest paid.
2. Get All Your Debt In a Manageable Place
Juggling a handful of credit cards and other loves on top of rent and mortgage payments and other monthly expenses can quickly become exhausting.
Consolidating debt into one manageable loan provides peace of mind because all of the debt will be accounted for, and it will only be one monthly payment instead of spreading out amongst a variety of lenders. Finding the best debt consolidation companies can take some time, but services such as Lendstart make the process simple and straightforward.
By combining balances into one debt consolidation loan, defaulting will be much more difficult because there will only be one deadline to worry about.
3. Identify a Finish Line
Finally, the most powerful benefit of debt consolidation is identifying a final payoff date for all of the balances. Revolving debt, especially credit cards, can have a seemingly endless and overwhelming timeline because the balance keeps growing even as it's being paid off.
Debt consolidation loans have a fixed payoff date, and as long as the payments are made on time, the debt will be gone, and the account will close on that day.
Reasons to Abstain From Debt Consolidation
Although debt consolidation can be helpful for some, there are a couple of scenarios where consolidation may not be the ideal approach.
1. Underlying Spending Habits
Many consumers get in over their heads with debt because of underlying spending problems. For example, people who are considering a debt consolidation loan Should identify the behavior that brought them to their current predicament in the first place. Suppose a debt consolidation loan merely serves to delay the inevitable and reset credit card balances only to make excess charges again. In that case, debt forgiveness plans or financial therapy may be a better option.
2. Added Costs
Loan origination fees, balance transfer fees, and origination costs can all add up to be a significant sum. If the costs associated with completing the debt consolidation process exceed the interest savings provided by the consolidation. In that case, applying debt reduction strategies such as a snowball or avalanche approach may be a better fit.