Debt Consolidation : Everything You Should Know About It
Updated: Feb 19
The thing about debt is when you decide to go into debt, it alters the course condition of your life. Regardless of your control over your life, it is your debt that now owns it. Imagine how much easier it would have been if debt came with a manual. All those due dates, penalties and interest rates, not to mention the financial pinch of keeping up with different types of loans wouldn’t have been as daunting as it is.
While getting a debt manual might be a pretty far fetched idea, wouldn’t it be great if there was a way to fuse all of your loans into one?
Well, as a matter of fact there is a way to get out of the red and increase your net worth. It is called debt consolidation. If you are someone who is struggling to stay afloat with a mountain of debt crushing you, it is probably time to consider debt consolidation.
Debt Consolidation 101
Read below everything you need to know about debt consolidation and if it is right for you!
What does it mean ?
Debt consolidation can be defined as the process of combining two or multiple loans into one. A debt consolidation loan is usually an unsecured personal loan that allows you to combine all your existing loans and replace them with this one consolidated loan.
More often than not, debt consolidation loans are used to combine credit card, personal and some other loans. Depending on the creditor and your credit standing, debt consolidation often allows you to either decrease your monthly payments or decrease the overall amount that you have to pay.
Where to Start With Debt Consolidation Programs
There are a few government debt consolidation programs but they are not necessarily for everyone. So, if you have decided not to take that road or you are not eligible, here’s how to get started:
First things first, find a suitable debt relief service and schedule an appointment with a counselor.
The counselor is likely to speak to you over the phone, internet or in person. Gather all the information and details about your debt situation before meeting them. This includes any and all of the amount you owe on credit cards, personal loans, department store cards or any other credit lines.
Your counselor will use this information to put together an adequate debt management plan. After talking about your financial situation, your counselor will develop a debt consolidation plan with your creditors. The resulting plan is likely to reduce account fees, monthly payments, etc.
Ways to Use It Effectively
Consolidated loans are not necessarily good for every financial situation and credit standing. Some of the downsides of debt consolidation include not qualifying for an interest rate that’s lower than your existing balances. Moreover, a longer consolidated plan often costs more in interest even with a lower rate.
Regardless of the loan consolidation pros and cons, here are three ways to use debt consolidation effectively:
1. Choose the Right Monthly Payments
When you are under an overwhelming burden of debt, a little wiggle room can make a big difference. And debt consolidation gives you a chance to choose the right monthly payments.
There are two ways to go about it. You can lower your monthly payments by opting for a lower interest rate or a longer repayment plan. Alternately, you can choose to pay more each month, which will help you get rid of your loans faster.
2. Do Not Take More Loans After Debt Consolidation
It is important to understand that debt consolidation is about restructuring your debt, not eliminating it. While it can help you get control over your existing loans, it does not guarantee to stop the cycle of borrowing. Only you can do that.
Therefore, once you have a debt consolidation loan, you must stick to responsible spending and a financial plan. Avoid taking additional debt and you will be well on your way to financial freedom. Here is an article on debt consolidation.
3. Get Lower Interest Rates
One of the biggest advantages of this is that you get to pay less interest. You get the chance to take a debt consolidation loan on lower interest rate, which helps you save a lot. However, in order to get a loan on lower interest rate, your credit standing has to be good enough.
If your credit score has improved since you borrowed the original loans, you can get lower rates. Sometimes, borrowers even with a below average credit are able to save if they consolidate high-interest debt to a lower amount. In any case, the best way is to get interest rate quotes from a few creditors before deciding to go with a consolidating loan.
Finding an effective strategy for debt management is the key to your financial freedom. Especially if you are dealing with high credit card balances and different types of unsecured loans, your safest bet against them is a consolidation loan.
That said, it is also important to remember that this debt management strategy is not a blanket solution for all. Every individual has a unique recovery process and a different credit standing. As long as you have the right strategies in place, consolidation can be a quick and effective way to tackle your debt.
If your choices have landed you in a heap of debt so far, you must hang on. Remember you have the power to work your way out. One great solution to keep your finances in check is through the Doctor Money app. Not only does it keep you on the right track, but it also helps you plan your future financial journey!