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When should you consider debt consolidation? People deeply in debt have to grapple with this question all the time. They look at their finances, look at their options, and feel totally overwhelmed and confused. Is debt consolidation the solution, or should they keep trying to get out of debt on their own?
The bad news is that there's no easy answer to that question. Like debt and any other financial question, pursuing debt consolidation is a deeply personal choice that is largely dependent on your personal and financial context. There's no obviously right answer and no simple test to figure out if debt consolidation is right for you.
However, common factors exist that you should think about when you're considering debt consolidation. We'll run through five of the most common questions that people ask themselves before pursuing debt consolidation, and we'll discuss how to answer these questions.
1. Will debt consolidation get you better interest rates?
People consolidate their debt to combine their payments into a single monthly payment, but that isn't the main reason they do it. It's actually to reduce the amount they pay in interest on their debt, which saves them money both now and later. So, before you sign on for debt consolidation, ask yourself if this going to lower your interest rates.
In fact, when choosing a vendor for your debt consolidation loan, getting the best interest rate will probably be the single biggest factor. So, what's a good interest rate for a debt consolidation loan?
You'd be surprised at how much interest rates on debt consolidation loans can vary. Some of the most attractive loan options can have interest rates as low as 5%. On the other hand, some debt consolidation loans can come with hefty interest rates as high as 36%. Most, of course, fall somewhere in between.
To make things more confusing, the interest rate that you pay on your debt consolidation loan could be vastly different from what another borrower pays, even if that borrower borrows the same amount of money. Lenders will offer different interest rates (and different terms in general) depending on your credit score. A high credit score indicates that you're a safe person to lend to, so lenders will offer lower interest rates in order to secure your business. A low credit score indicates a riskier investment, so lenders will often hike up interest rates in order to cover the risk of lending to you.
The takeaway is to comparison shop when seeking debt consolidation to make sure you're getting the best interest rate possible. If you can't find a good interest rate that would lower your overall interest payments, focus on improving your credit score by paying your debts on time and paying off your credit cards as quickly as possible.
2. Are you having trouble keeping up with multiple payments?
If you owe multiple debts to multiple different lenders, then you already know how stressful and difficult it can be to keep up with all of your different monthly minimum payments. On one hand, you probably feel like you're getting nowhere on your debt. On the other hand, you have to keep a ton of different dates and amounts straight each month so you don't fall behind.
Even worse, there's the wakeup call that you can't handle it anymore. You miss one payment, then another. You answer your cell phone and a collection agent is on the other end harassing you to make payments that you aren't sure you can afford. You've been just scraping by for a while; now, even that is in danger of falling apart. You need a new way.
If any of this sounds familiar, then debt consolidation might be the answer. By consolidating your debts into a single monthly payment, you eliminate all the stress and worry of having to keep track of multiple different payments to different creditors over the course of a month. You make one payment, once a month. What could be easier?
3. Have you already made a strategic effort to get out of debt?
Before you decide that you need debt consolidation, you should be sure that you've done everything you can to get out of debt on your own. While debt consolidation can be helpful to many people in many different situations, it's often more beneficial for you in the end to just buckle down and pay off your debts on your own.
First, if you don't have a budget, make one. It's easy; just subtract your monthly expenses from your expected monthly income. The money left over at the end of the month is the money that you have at your disposal to get out of debt. There are obviously variables at play each month, but you will at least have a general idea of where you stand.
Next, determine your debt repayment strategy. Two major debt repayment strategies exist: the debt snowball and the debt avalanche. Both focus on paying off specific debts faster in order to get out of debt sooner, but they differ on which debt you focus on.
The debt snowball is by far the most common strategy. With the snowball, you focus your extra funds on paying off the debt with the lowest total balance first. This is the debt that you're capable of paying off the fastest, and the thinking is that by paying off this debt, you'll have more money left over at the end of the month to pay off your second-lowest debt, and so on. It's a snowball effect.
The debt avalanche, on the other hand, takes the long view. With the debt avalanche, you focus on the debt with the highest interest rate, regardless of the total balance on the debt. By eliminating the highest interest debts first, you should theoretically end up saving the most money on your debt in the end by paying far less in interest than you would otherwise. You have to be it for the long haul, though, as high-interest debts can take a long time to pay off.
If you've tried and failed to make headway on paying off your debt on your own, or you simply don't have enough income to make any meaningful progress on strategically paying off your debt, then debt consolidation might be for you.
4. Do you understand why you ended up in debt?
One of the most important things to understand before you seal the deal on any kind of debt consolidation is not just how you ended up in debt (credit cards, medical bills, etc.) but why you ended up in debt in the first place. This exercise requires you to be critically honest with yourself, but it's vital to your long-term financial success.
How did you end up with so much debt on your plate? Some of it, probably, was almost unavoidable. You needed student loans so you could go to college, get your degree, and get into the workforce. You needed an auto loan so that you could buy a car to get to work. You needed a home loan because you needed somewhere to live. These are some of the largest major sources of debt in the United States and, for the most part, they're difficult to avoid.
Those aren't the debts we're worried about here, though. The debts that you really need to understand are the debts that you took on unnecessarily. Often, but not always, those are credit card debts.
If you have significant credit card debt, think back to how you ran up those credit cards in the first place. Was it making essential purchases that you couldn't otherwise afford? Did you spend impulsively? Did you run up your credit cards buying luxuries such as fancy shoes, clothes, gadgets, and accessories? Were you using credit to finance expensive nights out in order to treat yourself? Did you keep letting yourself get sucked into opening store credit cards to lock down discounts, only to end up actually using (and overusing) the card to keep the deals coming?
If you answered yes to any of the above questions, then you have some serious thinking to do before you pursue any form of debt consolidation.
That's because debt consolidation only works if you're willing and able to live a financially responsible lifestyle that doesn't rely on credit or overextending your budget to make ends meet. At the core, debt consolidation is not a solution to your debt problems. It's a means to an end, a way to make the present a little simpler to deal with so that you can focus on building a better future for yourself.
The sad fact is that a significant percentage of people who seek debt consolidation end up in even worse debt within a few years. That's because they can't hold themselves back from spending. They get a debt consolidation loan and pay off all of their credit cards. All of a sudden, their credit lines are free and clear, and they can't resist the temptation. They run up their credit cards all over again, and now they owe money to their debt consolidator. They're worse off than before.
Before you seek debt consolidation, you need to face the behaviors that got you into debt in the first place and make a concerted effort not to repeat them. Otherwise, consolidating your debt will hurt you more than it will help you.
5. Have you found the right debt consolidation partner to work with?
Here's an open secret if you couldn't figure it out already: Many so-called debt consolidators are not to be trusted. While there are many reputable debt consolidation partners out there to consider, plenty of ineffective organizations exist as well.
Disreputable organizations thrive in an industry such as debt consolidation because their potential customers are often vulnerable and in desperate situations. Say you've figured that your best hope to take back your financial freedom is to consolidate your debt, but due to a history of missed payments, your credit score is much lower than average. Most debt consolidation lenders will be reluctant to lend to you, assuming that you aren't a safe bet to pay the loan back.
Desperate, you stumble across a lender that promises to lend you the full amount you need to pay off your debt without even bothering with a credit check. Your dream came true!
Not so fast, because that lender is likely either going to charge you an insanely high interest rate on your loan or put you into a program that isn't going to do much to help you in the end. The company is happy to take your money, but it really has no intention of doing anything to help you with your debt.
In general, you can spot a disreputable debt consolidator by looking at what it's promising you. Does the company guarantee results? Does it say it will lend you any amount regardless of your credit score, credit history or, seemingly, your ability to pay it back? In general, does the company seem too good to be true?
To research your debt consolidation company, your first step should be to take to the Internet. Google the business name and see if you can find impartial, third-party reviews from real past clients. Look at what they say. Did the company solve their problems? Do their problems sound similar to the ones you're dealing with now?
If you're curious as to whether National Debt Relief can help you with your debt problems, we encourage you to check out our reviews. We're proud of the number of people we've been able to help, and we think you'll be encouraged by the results as well. If you want to take the next step, contact us today!