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Debt Consolidation: What Is It?

 

What happens when you consolidate your debt?

Student loans, personal loans, credit cards. For many of us, money is simply too hard to come by to be able to afford all our needs and wants. This means that debt piles up as we struggle to make the most of our finances and resort to using what’s available to cover the costs of living. Unfortunately, debt does have to be paid off, and one of the ways to do that is through debt consolidation. But what exactly is debt consolidation?

 

What is Debt Consolidation?

Debt consolidation is where you take multiple outstanding debts and combine them into a single monthly payment. There are a couple ways this can be done. The first is through a debt consolidation loan, where you use a loan to pay off your debts and then focus on making the single payment for the loan rather than worrying about multiple payments at once. The second is through a debt consolidation company. This way, you make your single payment to the company, which then divides your payment and sends the funds to your creditors. It’s important to note that debt consolidation does not lower your debt, it simply combines it into one payment rather than several.

 

Is Debt Consolidation Right for You?

The trick to debt consolidation is to be responsible. Remember that you have the same amount of debt, just a potentially easier way to keep it under control and take care of it. Stop using credit cards and refrain from taking out any loans. This way, you can focus on the debt you do have instead of adding to it. Debt consolidation isn’t right for everyone, but it can be a good solution for anyone looking to simplify their debt payments. Here are some of the pros and cons to debt consolidation:

 

Pros

  • One payment instead of several.
  • Usually smaller payments over a longer period of time.
  • Lower interest rate. One payment has one interest rate instead of paying interest on multiple payments.

 

Cons

  • You may spend more. It might take you longer with the extended payback time to pay off your debt, meaning although your interest rate is lower, it’s collecting for longer.
  • It doesn’t solve the problem.
  • If you still use credit while paying off your debt, you may end up in a worse position. Don’t get too confident about consolidating your debt – just because you’re making one (typically smaller) payment doesn’t mean you have less debt to pay and more money to spend.

 

Keep these in mind when considering your options – and if you do decide to consolidate, actively use some kind of planner or calendar to stay on top of your payments so that you don’t fall more behind and deeper in debt.

 

Before taking any action on your debt, it’s wise to do your research. Consult with a financial counselor to learn what your best options are. Debt consolidation may be the right choice for you, but don’t jump into anything you’re unsure about. Remember, any action you take on your debt and finances will likely impact them for a long time. Be smart!

 

 

Wednesday, August 22, 2018

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