Being up to your neck in debt is never a situation anyone wants to be in, however many people end up in these complex scenarios. Some struggle to manage their income well, whereas other people keep on experiencing financial strain. Being overwhelmed by debt creates not only financial but personal and mental health concerns. The constant stress of knowing you need to pay off debt impacts on a person’s wellbeing and social environment.
The figures below provide insightful information regarding people’s ability to experience high debt levels. If you held in a financial decay, then debt consolidation offers a solution. According to data released by Federal Reserve, personal debt in America touched $14 trillion in 2019 (Refer to the graph below).
The data illustrated above bifurcates personal debt into housing commitments such as mortgage and non-housing debt. It shows in much greater detail in the next graph.
The data displays that apart from mortgage payments, people also struggle with the settlement of student loans, credit cards and vehicle repayments. Other types of debts include personal debt or payday loans, etc. This means that many families become indebted to the extent where they struggle to maintain their payments. In such a situation, debt consolidation seems like the most sensible way to deal with multiple debts. So let us dive into the specifics of debt consolidation and find out what the process entails.
1. What is Debt Consolidation?
Debt consolidation offers an opportunity to merge all the different debts into a single loan. The financial loan offers a single monthly payment, but with a high-interest rate. It may be possible to obtain a lower rate on consolidated debt, but this depends on your creditors. Having a lower rate of interest may help you in paying off your debt faster; however, in most cases, the interest in consolidated debt seems considerably higher.
An individual must remember debt consolidation only assists to create a more workable return rate and do not eliminate any debt. Pay every penny you owe and perhaps a little more because most consolidated debts require a longer payback period. The longer the borrower provides you with the money you need, the longer you pay to settle the amount.
2. Common ways to Consolidate Debt
When you go for debt consolidation, you face several options. Let us look at some of these opportunities now.
a) Balance transfer.
If you carry debt on several credit cards, then you stand the opportunity to combine them. You consolidate them in a single balance transfer card. You need approval from your bank first to receive a balance transfer card. Many banks offer promotions on their cards with 0% interest for limited periods. This option provides a window to take advantage of the benefit and settle your debt with zero interest.
Before choosing this option, make sure you understand the terms and conditions of the balance card and the APR bank charge. The debt you want to consolidate may calculate to more than the credit limit offered.
b) Personal loan.
While there are many benefits of applying for personal loans, one of the most underrated uses of a personal loan relates to debt consolidation. A personal loan eliminates all the different debts that you had and leaves you with a single liability over an agreed period. The advantage of merging your debt using a personal loan provides suitable interest rates and perhaps a longer payback period.
c) Home equity line of credit.
This is the riskiest option for consolidating your debt. Getting a home equity line of credit involves using your house as collateral for a line of credit. The line of credit can allow for debt settlement and leaving you with a single repayment amount. This is by far the riskiest option because you may lose your home if you restrain from paying your instalments.
A person should avoid this option unless you feel certain you can maintain the payments.
d) Debt merging agency.
There is also an option of using the services of a debt consolidating agency, but this involves paying the agency fees for their services. The debt consolidating agency negotiate with your lenders on your behalf and offer you a single loan. It may present a higher payment than all the debt you have at the moment, but at a lower rate of interest.
Similar to the options we discussed earlier, you receive the opportunity to focus on a single payment and no longer struggle with multiple payments. It provides some clarity and space to settle your debts in a realistic time.
3. Is Debt Consolidation Right for You?
In order for debt consolidation to work, you need to follow a strict discipline. Debt is only a symptom; the real problem with most people who become indebted relates to continuous spending or lack of income. Even if you become free of debt using a debt consolidation plan, you may end up being indebted again. Debt consolidation only works if you correct your spending pattern or increase your income in the long term.
To conclude this discussion, debt consolidation provides an option to settle your financial obligations. Merging all the debts into a single payment helps people to focus on one payment, but requires commitment until the end of your loan term. There is no point in consolidating your debts and becoming debt-free if you end up in debt again because of poor financial management. Hopefully, this discussion helps to provide clarity in the matter.
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How does debt consolidation work?
Borrowers consolidate their debt by taking out a new loan and using the proceeds to repay their previous loans. This may include credit card balances, auto loans, student loans, and other personal loans.