Finding yourself indebted to others is in no way an uncommon occurrence, particularly in modern times. As costs of living rise and pay increases stall, many families are faced with credit card usage or taking out loans for simple, everyday things like covering mortgages, paying for healthcare, or funding either their own or their childrenâs education.
While itâs a truth many people face, it can also sometimes feel like a major burden. No one needs the added stress of bill collectors beating down the proverbial door, particularly when studies have shown that debt has a direct effect on stress and anxiety in the body [1].
Perhaps youâve heard the term âdebt consolidationâ before, but always wondered what exactly it meant. More to the point, could it be for you? Understanding more about how this debt payoff technique works can go a long way to helping you understand if itâs the best avenue for you. Read on to the end to see all our best tips.
What Debt Consolidation Really Means
In simple terms, debt consolidation refers to a means of bundling all your debtâcredit card, home loans, college debtâinto one place where you can then begin to pay it off in reasonable, lump sums. Think of it like a one stop shop for all your debt paying means. Have you ever felt overwhelmed with all the different lines of credit you have? Ever felt stressed out having to keep track of who you need to send a check to, who takes online payments, and who is set up on autopay? Debt consolidation is a way of streamlining the process, putting all those payments in one spot.
And there are other benefits, too. Often, if you are working with a debt consolidation company, you can receive certain incentives to pick one provider. For example, a debt consolidation firm may offer potential clients a reduction in their interest fees. Or, another provider might be able to work out a deal for you that sees a portion of your debt completely forgiven, meaning you donât have to pay all of it in full. Knowing what incentives you can take advantage of is a big part of making a plan to move forward.
What Types of Debt Consolidation Are There?
The term âdebt consolidationâ can refer to a number of different ways that people consolidate their debt. Credit car debt consolidation is one of the most widely used, and this is when an individual works with a credit union to essentially secure a loan. The individual then pays that credit union, typically monthly, at a set rate that is usually lower than they would have paid if they were trying to pay off their debt without consolidating. A debt management plan is similar, but sometimes involves startup fees and can take longer to pay off than using a credit union. Other ways of debt consolidation involve different types of loans, like taking out a loan from your 401k or taking out a home equity loan. And some people opt to use a balance transfer credit card, which entails moving all your debt to one card that you can then systematically pay off.
Whichever technique you explore, there are various pros and cons and itâs key to understand which option would fit your needs best. Pay attention to interest rates: the goal is to be paying an overall lower interest rate than you would be paying if you were trying to pay off your debt piece by piece.
Is Debt Consolidation Right For You?
In considering whether or not debt consolidation is the right move for you, one of the biggest things to consider is interest rates [2]. If you currently pay a high interest rate, consolidating debt and loans to pay a lower monthly fee will go a long way to getting you out of debt faster. Likewise, if your credit score is at a good place, youâll likely be able to consolidate with a credit union or with a credit transfer card easily. And if youâre able to set a payment plan, meaning create a monthly budget of repayment and stick to it, you are likely a good candidate for debt consolidation.
Another factor is how much debt you have total. If your debt is on the smaller side, say under $10,000, you may not see a huge benefit to consolidation. If your debt is on the higher side, however, consolidating in order to achieve a lower monthly interest rate will almost certainly get you out of the hole faster. Remember, those interest fees can make it so some people never get out of debt, particularly if you are only paying the minimum amount each month [3].
Making the Financial Choice Thatâs Right For You
Ultimately, the decision to start tackling your debt is a hugely personal one, and part of a financial journey we all have to come to terms with. But getting that debt under control is a big way to potentially cut stress and anxiety from your life, allowing you to focus on the good things youâve got going for you.
Now that you understand the process a little better, itâs time to take your financial future into your own hands. There are a multitude of debt consolidation options out there, and making the best decision for you and your family will go a long way to setting you up for financial success moving forward. Knowledge is power, and working out if this process is the best fit for your needs puts you back in the driverâs seat.
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