The average American has over $38,000 of consumer debt looming over their heads. And that doesn’t include mortgages.
Between credit card payments, car loans, personal loans, school loans, and hospital bills, keeping up with your expenses can be completely overwhelming. Unfortunately, we live in a society that feeds the need and the ability for immediate gratification. What we can’t afford now, we finance.
While this can be necessary for buying a home, cars, and other big-ticket items, it can also lead to financial stress and instability. Fortunately, debt consolidation options exist to help people out of these sticky situations.
Keep reading for five things you need to know about the debt consolidation process.
- There Are Several Debt Consolidation Options
First, let’s talk about your options. Debt consolidation can be accomplished through a myriad of strategies.
First, you can use a home equity line of credit. This secures your loan (with your house) which may help you get approved and offer lower rates. However, your house is now collateral.
You can also get a debt consolidation loan, but your eligibility will be limited based on your credit score. Read more about debt consolidation loans here.
Alternatively, you can hire a debt consolidation company that compiles all of the debts into one payment. This makes your debt easier to manage but gives you one more person to pay.
- Getting a Debt Consolidation Loan May Require Boosting Your Credit Score
As noted above, your credit history may have a significant impact on your ability to consolidate your debt. You may even have your hands tied until your credit score improves. In this case, we recommend taking powerful measures over the next three to six months to boost your credit score.
- You’ll Need to Prioritize Your Debts
Next, accept that your debt consolidation strategy may not account for every single debt you have. You’ll need to prioritize which debts you wish to be absorbed. It’s always a good idea to consolidate credit card debt because those often have the highest interest rates.
Use a debt consolidation calculator to determine which debts will cost you the most in the long run, with respect to their total amounts and interest rates.
- Weigh the Pros and Cons of Debt Consolidation
Based on your research, you need to weigh the pros and cons of debt consolidation.
- Get rid of high-interest debts
- Consolidate multiple payments to a single payment
- Pay less per month
- Debt consolidation does not reduce your debt amount
- Debt consolidation can draw out your payments
- Debt consolidation can come with risks (such as using your home as collateral)
Ultimately, you’ll need to decide if the benefits of consolidating your debt are worth the potential risks or downsides.
- You Must Also Address the Crux of the Problem
You didn’t get into debt overnight or by accident. With few exceptions, your debt is a direct reflection of your spending habits. For even the best debt consolidation to work, you need to learn some money management skills.
This may mean cutting back on impulse shopping, unnecessary luxuries, memberships, and other non-essential expenses. Try to limit how much you’re borrowing money through loans, credit cards, advances, etc.
Are You Considering Debt Consolidation?
If you’re in financial distress and are considering a debt consolidation plan, we feel for you. Unfortunately, many people have been in your shoes before and many will come. But you’re not alone.
Our blog is dedicated to helping people like you improve their lives. Check out our other articles to find more information on personal finance, business, health, and more.