The Benefits and Considerations of Debt Consolidation
If you're struggling with high interest costs and multiple loan payments every month, debt consolidation can be an effective strategy to streamline finances and pay off what you owe faster, but it requires careful evaluation to ensure it will actually improve your situation.
There are several ways to consolidate debts including balance transfer credit cards, personal loans, and home loan refinance.
The Benefits of Debt Consolidation
Lower Interest Rates: The prime benefit of debt consolidation is securing a much lower interest rate, reducing your total interest costs substantially.
For example, by rolling credit card balances on an average of 20% interest into a consolidation loan or line of credit at 10%, you can save hundreds of dollars each month. Reducing interest is crucial for paying debts off faster.
Single Monthly Payment: Having different payment dates and amounts for each credit card, loan, and other debt can be a headache to manage. A debt consolidation loan or credit facility streamlines everything into one predictable loan payment each month, making it much easier to track and budget.
Pay Debts Faster: That lower interest rate combined with a single manageable payment makes it easier to pay off your consolidated balance faster. Where minimum payments on credit cards could take years or decades to pay off, a consolidation loan can help you become debt-free in a fraction of that time, especially when extra repayments are also allowed.
The Things You Should Consider
You should always carefully compare all the costs involved before consolidating debts. Calculate total interest for your current debts and compare that to the rate and term of a consolidation loan to confirm it actually saves money. While the new interest rate may be lower, extending the repayment timeline can mean greater interest paid overall. In addition, you should also be mindful of any fees on the new loan and any exit cost on the existing debts. Consult with an experienced mortgage broker so they can crunch the numbers for you.
Is Debt Consolidation Right for You?
When used prudently, debt consolidation can be a useful strategy towards financial rehabilitation. A single payment plan helps you focus on debt reduction, and extra repayments can accelerate payoff. However, care and caution must be exercised and assessing costs, terms and your discipline is key. Are you disciplined enough to not rack those credit cards back up?
Consolidation provides the opportunity to tackle your debts in an organised way, but it's still up to you to modify spending habits and avoid repeating the problem.
Our experienced team at Investors Mortgage can advise whether debt consolidation makes sense in your unique financial situation. Contact us today to explore your debt relief options!
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