Debt consolidation is the process of eliminating several smaller debts by taking out a new loan or line of credit. This form of managing debt works for many people, but it may not be suited for everyone.
Before deciding on consolidating debt, there are a few things that person should consider. Once several factors are considered, it should be easier to narrow down whether consolidating debt is the best solution for an individual and their finances.
Consider the Main Goals of Consolidating Debt
It may be helpful to keep in mind the main goals of debt consolidation before starting the process:
- To condense several debts into one single form of payment, to make paying debt off easier.
- To reduce the interest rate on debt.
- To pay off all debt quicker.
Consider the Amount of Debt You Have When Considering Consolidating Debt
Before seeking debt consolidation, it is important to consider the amount of debt that an individual has. This debt can range from loans to credit cards. Generally, debt consolidation is recommended when:
- There are several different debts to pay each month.
- When the debts all have different repayment terms.
- When organizing all debt into one will actually be beneficial in some way.
Consider How Long Your Debt Will Take to Pay Off When Considering Consolidating Debt
This is a huge factor to consider when thinking about consolidating debt. Interest is often the most expensive cost of borrowing money. No matter what kind of loan is taken out for this process— it will also have interest attached to it.
Here are a few ways that interest and loan length, generally, impact each other:
- The longer the loan, the more interest is paid
- The shorter the loan, the less interest is paid
So before a person thinks about debt consolidation, it is important that they compare the lengths of their existing loans with the length of their potential new one. In general, it is important to consider this rule:
If a person’s debts can be repaid in six months to a year, debt consolidation is not a good idea!
Consider Your Finances When Considering Consolidating Debt
Another huge factor to consider before choosing debt consolidation, is to make sure that an individual already has good financial habits. Here are a few important habits to have:
- An individual is already able to make their monthly payments on time.
- An individual knows their budget for a new loan.
- An individual has been responsible with lending in the past.
- An individual’s debt does not take up 50% or more of their income.
An important thing to know about debt consolidation is that it doesn’t teach good financial habits. If an individual does not have good financial habits established before beginning the process of debt consolidation, they should hold off for now. If a borrower is not ready to take on that responsibility, another debt solution may work better for them.
Consider Your Credit Score Before Considering Consolidating Debt
Credit scores and credit history go hand-in hand with finances. They are important factors to consider before going through with debt consolidation. This is because a person’s credit score and credit history will impact the interest rate they get.
One of the main goals of debt consolidation is to get better interest rates. But only those with good credit should pursue this form of debt management. Doing otherwise may make paying off debt costlier than before starting the process.
The good news for those with low credit is that there are many ways to improve a credit score with small, easy steps. Once an improvement is made, then this form of debt management can be considered.
Consider the Lender and Loan Before Considering Debt Consolidation
Another important factor when thinking about debt consolidation is finding the right lender. There are generally two types of lenders when looking for any kind of loan:
- Direct Lenders: These lenders can give out loans themselves. Before choosing a direct lender to work with, it is important to check out several.
- Loan Financial Referral Services: Like MaxCash, these are not lenders themselves. Instead, they work with several groups of direct lenders and compare loan offers for customers.
It is important to do research on the different kinds of loans out there and consider which work best for debt consolidation. Here are a few types of loans that may work well for debt consolidation:
- Unsecured Personal Loans
- Home Equity Loans
- Low-Interest Credit Cards
If an individual is thinking about consolidating debt, there are a few things that they should consider— all while keeping the main goals of debt consolidation in mind.
Before seeking debt consolidation, it is important to consider; the amount of debt a person has, how long it will take to pay those debts, individual finances, the lender of the new loan, and what kind of loan an individual wants to take out for this purpose.
Once a person considers all these factors, they can make an informed decision on how to best manage their debt.