How to Decide if Debt Consolidation Is Right for You
We’ve all seen those offers on TV claiming that they can help get you out of debt by consolidating your debts into a single, low monthly repayment. It may sound too good to be true, but that is not necessarily the case. Here’s what you need to know to determine if debt consolidation makes sense for your particular situation.
When Debt Consolidation Is the Best Solution
If you are serious about changing your financial habits and dedicating yourself to getting out of debt, consolidation may work for you. You’ll need to carefully evaluate your finances to determine whether or not you can actually save money by consolidating your debt. Take into account any early repayment fees, loan origination fees or balance transfer fees. You’ll also need to look at the amount of interest you will pay over the life of the loan. If the total amount you will end up paying is less than what you would pay at your current repayment rate, then debt consolidation is a good idea for you.
When Debt Consolidation Is Not the Best Solution
Banks offer debt consolidation loans because they generate income for the bank. If they are bringing in more money for the bank, they may not be in your best interests. If the total amount you will end up paying with a debt consolidation loan is higher than what you will pay making individual repayments, you may want to reconsider continuing your current repayment plan.
One of the biggest problems with debt consolidation loans is that they do nothing to change the behaviour that got you into debt in the first place. In many cases, people use debt consolidation loans to pay off their credit cards, but then immediately start running up the balances on those credit cards again. All this does is dig you into twice the financial hole. If money management is not your strong suit, debt consolidation could be setting you up for financial disaster.
Alternatives to Debt Consolidation
If you are truly struggling financially, debt consolidation is not your only option. Debt management is another method you have available to you. This involves contacting your creditors individually and working out an extended repayment plan with lower or no interest. This can be particularly useful if your financial strife can be expected to be temporary.
With any type of debt consolidation or repayment negotiation, it is crucial that you take the time to fully understand what is involved. You do have options available to help you get out of debt, but it is important to carefully evaluate each option to determine which is best for you.