When Debt Consolidation Offers Work for You
- Author: Chris Remington
- Posted: 2024-06-29
Many people advise you to avoid debt consolidation. They argue that it is a scam that leaves you worse off than if you did nothing. However, there are some scenarios in which debt consolidation can work for you. This is especially true if you end up with improved credit and lower monthly payments. Before you completely rule of debt consolidation, here are some situations in which debt consolidation can help your bottom line.
Debt Consolidation Works When You Can Lower Your Monthly Payments
You might be able to use debt consolidation to lower your monthly payments. The key is the interest rate that you get on your consolidation loan. If you are paying multiple credit cards with interest rates above 20%, you will end up much better off if you are able to cut the rate that you pay. Interest makes up for much of your monthly payment and can keep you from even making any dent at all in your principal.
You need to be really careful about looking at the fine print on the debt consolidation loan. The interest rate range on these products can vary widely. There are some debt consolidation loans that have rates below 12%. If the bulk of your debt is high-interest credit cards, you should jump at that chance. However, you need to make sure that you are getting a fixed interest rate. If the interest rate is introductory and goes up after time, you may end up worse off than you are now. The main reason why you would consolidate debt is to save money, and if the interest rate allows you to do that, you should seriously consider this product.
Debt Consolidation Can Buy You Additional Time
Consumers might also benefit from a debt consolidation loan if they need more time to pay their debt. They might have an account with a balloon payment due and might not have that money. Debt consolidation loans will give you a fixed date for paying off one loan. This can buy you more time if there is a debt coming due that you cannot pay. The debt consolidation company will pay off that debt, and you will then write your checks to them. This gives you one unified due date each month and an end to your debt situation so long as you are able to keep up with the payments on your debt consolidation loan. In other words, if you just need some room to breathe, debt consolidation loans may work for you.
Debt Consolidation Helps When Combined with a Plan for Future Financial Discipline
You may also benefit from this product if you have a plan to get a fresh start in life. A debt consolidation loan combined with a spending plan to keep yourself from racking up large debt again may be a way to begin anew on the way to a debt-free life. You may have a goal of restraining your spending along with a plan to do so. However, the debt that you ran up in the past may still be a significant overhang that keeps you from starting a new life. Consolidating all of your payments into one with a lower overall monthly payment is a first step to take to start reaching this goal. However, it must go along with your own personal plan to cut your spending in the future.
Debt consolidation may work for you assuming that you already have the cash flow to cover your monthly payments under the loan. It would make no sense to take out a new loan knowing that you do not have the money to pay it, and lenders would not give you money if they knew that there was a high chance that you would default on the loan. If you are saving money and it is within your monthly budget, there is little downside to a debt consolidation loan. You should be able to comfortably make your payments each month and not be at risk of defaulting because then, you would not be receiving the benefits of the loan.
Note that a debt consolidation loan does not necessarily mean that you are going to a specialized lender for these products. Debt consolidation can include credit card balance transfers. If you qualify for a zero interest rate transfer offer, you should look at that first as your means of debt consolidation.
