The Benefits of Debt Consolidation

The Benefits of Debt Consolidation

When your outgoing balances on credit card statements continue to increase, paying it off and becoming debt-free can feel like an impossible goal. This becomes even more difficult when multiple credit cards are involved with varying high interest rates. If you’re looking for a way to take back control of your finances, consolidating your debt might be helpful. It’s a way for you to get the start you need in taking back control of your finances and simplifying your monthly bills.

Consolidating debt involves transferring all debt onto one balance, instead of having multiple statements to pay off each month. And there are many pros to this solution. It’s important to know how it works to decide whether or not it makes sense for your financial situation.

What Is Debt Consolidation?

Consolidating your debt is a major financial decision. It’s a way for those in serious debt to merge their multiple statements onto a single debt. There are multiple ways a person can consolidate their debt.

This course of action eliminates the bills that pile up from multiple credit card companies each month. Instead of having to keep meeting the minimum payments for several cards, you can focus on paying off one lump sum of debt instead. This transfer should typically have you paying a lower interest rate compared to your traditional credit cards. You would then make payments towards your single liability until it’s paid off.

Consolidating debt is an ideal solution for people whose debt (excluding mortgage) does not exceed 40 percent of your gross income and you have a plan to avoid being in major debt again.

There are two main ways you can go about consolidating debt.

1. Transfer Credit Card Balances
This transfers all of your credit card onto one single credit card. This new card should have a lower interest than your current rates, and you should be able to secure a low monthly payment. It’s an option for those who are in debt with a decent credit standing.

2. Get a Debt Consolidation Loan
This is when you start a financing payment plan with a financial institution that pays off your credit card debt. Usually, a debt consolidation loan is a personal loan with set repayment terms. Your credit balance will be at zero and you will begin paying a fixed-rate towards the financial institution to pay off that loan.

Alternatively, you could also consolidate your debt through a home equity loan or 401(k) loan. This is a riskier form of consolidating debt because it can directly impact your home and retirement situation. Taking the time to compare options while keeping your debt-to-income ratio in mind will ultimately help you make the right decision.

The Benefits Of Debt Consolidation

As helpful as consolidating your debt can be, there are still pros and cons. You should make sure the benefits of consolidating debt outweighs the cons before committing to taking out a loan or transfer credit card.

The first benefit to this financial decision is you will no longer be making multiple payments with high interest rates. Those debts will be paid off to your credit card companies, leaving you with only one balance to take care of and simplify your finances.

Some other pros to debt consolidation are:

  • Regain a sense of control over your finances
  • Obtain a lower interest rate through a transfer credit card or loan
  • Obtain a lower monthly payment
  • Can potentially help your credit score in the long term

Of course, there are some cons to keep in mind when it comes to consolidating your debt. One of them is that there is a chance you will continue spending on your credit cards and accumulate more debt, on top of your consolidated loan or transfer credit card.

It’s important to remember that debt consolidation does not erase your debt. You are still responsible for paying off your existing balance, just to a different financial entity. If you are looking for financial relief, it would be best to look for a debt-relief organization or program instead of consolidating debt.

How To Choose A Debt Consolidation Loan

You have options when it comes to consolidating your debt. There are multiple outlets to choose from and you can make this choice depending on the severity of your financial situation or your personal preference.

If you have a good credit score, consider applying for a transfer credit card with low interest. You may be able to get a balance transfer card with a zero percent interest rate for a limited period of time. You also have the option of taking out a loan to eliminate your debt and pay back the lienholder on a fixed-rate. This can make your debt more manageable.

Make sure you understand the pros and cons of debt consolidation before committing to it. Talk to a financial advisor or look online to find out if you’re in a position that makes sense. You could end up simplifying your finances, score a lower interest rate and monthly payment, and have more control over paying off your debt.