Debt in the U.S. at this point is almost unavoidable.
With consumer debt topping $14 trillion, it’s more likely than not that you’re burdened by a piece of debt that needs a solid financial strategy to tackle.
This is the point where debt consolidation comes in.
If you’re dealing with substantial amounts of debt, having debt consolidation organize your debts and centralize them for you to manage a single debt can be beyond helpful.
Yet, with all of the benefits that debt consolidation brings to the table, there are a few disadvantages to keep an eye on.
Keep on reading for our full breakdown of what debt consolidation entails, its main types, as well as the benefits of debt consolidation and its drawbacks.
What Is Debt Consolidation?
In the simplest of terms, debt consolidation is the merging of all of your debts to a centralized account, with a single monthly payment.
The main idea behind debt consolidation is having fewer payments per month. This way you can plan and budget, as well as decrease your missed payments rate.
Furthermore, getting a debt consolidation plan in place with a lower interest rate can help you pay off your debt even faster than your original debt timeline.
Foundations of Debt Consolidation: Things to Keep in Mind
There are a couple of basics that you’ll need to keep in mind when you start looking at debt consolidation options.
First, debt consolidation —traditionally— won’t include secured loans, like car loans. Yet, they’re perfect for unsecured debt, like credit card debt, personal bank loans, and lines of credit.
Second, you might have to sacrifice your credit card usage and other accounts that are involved in debt consolidation.
Once these accounts are considered part of your debt consolidation package, you won’t be able to increase the original amount of debt coming through these accounts.
Types of Debt Consolidation
As an overarching strategy, debt consolidation can come in a variety of different formats. Yet, you’ll find that some forms are more common than others.
A consolidation loan is a specific type of loan that you’ll find on offer through a variety of financial institutions. It’s considered to be a subtype of a personal loan.
Moreover, one of its benefits is the ability to make the same payment every month for a set duration, which tends to range between three and five years.
As with a regular personal loan, you’ll be able to watch your progress and know exactly when you’ll be free of debt.
Consolidation Credit Card
Another form of consolidation would be getting a consolidation credit card.
These would be a great option if your credit score is decent. Once you qualify for a credit card, you can transfer balances.
Also, if you receive an offer with an attractive rate for balance transfers, then it will potentially save you money in the long run.
The Benefits of Debt Consolidation
Now you’ve garnered a solid understanding of what debt consolidation entails, as well as the common types available.
It’s time to take a close look at the benefits of debt consolidation.
Pay off Debt Faster
The whole philosophy behind debt consolidation is moving all of your debt to a single account with a lower interest rate.
Your payback plan will be much more reasonable, and most importantly, attainable. This will enable you to pay off your debt in a shorter period.
Also, as we’ve previously discussed in consolidation loans, you’ll have set payback periods to plan for in advance. Thus, you’ll know how long it’ll take you to pay off your debt.
Credit Score Boost
Many people are surprised to hear that consolidating their debt would raise their credit scores.
However, it’s rather logical. For instance, you can use a consolidation loan for bad credit. This would reduce your credit utilization rate, which will give your credit score a boost.
Easy Automatic Payments
Instead of trying to tackle and remember a million due dates for debt monthly payments, you’ll only have to remember a single date.
Furthermore, you can also set up automatic payments and completely remove the whole process out of your mind.
The freed up time allows you to turn your attention to other aspects of your financial health, like budgeting and investments.
As it were, most financial problems tend to generate rather high levels of stress. By integrating all of the previous benefits, it’ll decrease your stress levels substantially.
Besides, there is nothing riskier to your financial health than making decisions when you’re feeling pressured and stressed. It’ll help you manage other financial issues with a clear and calm mind.
The Disadvantages of Debt Consolidation
As with any financial instrument, there are drawbacks to be aware of. In the case of debt consolidation, there are minimal disadvantages to keep in mind.
You’ll find that, in most cases, the interest rates will be higher than secured loans. Therefore, you’ll have to shop around for the best offer available to you.
Likewise, there are some tight financial rules that you’ll have to contend with to get your debt consolidation loan or credit cards.
For example, you won’t be able to use a consolidation credit card for anything else but paying off your debt. If you made a mistake, these charges might generate interest that you weren’t planning on paying for in the first place.
Financial Health Starts Here
The benefits of debt consolidation are beyond count. Yet, as with any financial solution out on the market, you’ll have to make sure to do your research into rates and conditions.
Now, you have a solid foundation on how debt consolidation works, its main benefits and drawbacks. You can go ahead and start shopping for the right package knowing that you’re well-informed on how it all works.
However, there are some cases where debt consolidation won’t completely cover your financial needs. That’s where debt restructuring comes in.
Therefore, make sure to check out our blog for all the financial advice you need, as we cover a wide range of financial topics.