When looking for a way to deal with your debts, a possible option could be debt consolidation. Below is a brief guide to consolidating debts and whether it’s the right option for you.
What Is Debt Consolidation?
Debt consolidation involves paying off multiple debts with a single loan. If you’re juggling personal loans, unpaid credit card bills and arrears, a debt consolidation loan could help to make things more manageable by turning all your debts into one debt.
There are specialist debt consolidation loans out there for this purpose. They tend to have fixed monthly instalments and low interest charges. Some consolidation loans are even applicable to those with a low credit score (although they tend to come with higher interest rates).
You don’t have to use a specialist debt consolidation loan to consolidate debt. Some people use balance transfer credit cards, others use home equity loans or some borrow from their 401(k). Any loan used to pay off multiple debts can be a form of consolidation – however specialist debt consolidation loans tend to have better perks such as less interest.
The Pros and Cons of Debt Consolidation
- Easier to keep track of your debts (several debts become one debt)
- Less interest means that you can pay off your debts more quickly
- Available to those with a low credit score
- It doesn’t get rid of the debt but simply consolidates it
- Monthly repayments could be more expensive
- There are sometimes extra fees to factor in (such as loan origination fees, closing fees, late payment fees etc.)
When Is Debt Consolidation a Good Idea?
Debt consolidation is a good idea if you want to pay off multiple creditors and are currently struggling to do so. You’ll improve your relationship with these creditors and you’ll likely find it easier to keep track of your debts.
Debt consolidation may not be so good if you’re likely to continue borrowing after or have already previously consolidated debt. It’s also important to factor the debt consolidation loan repayments into your budget as they could be more expensive – if you can’t afford to pay off your debt consolidation loan each month, you could start accumulating extra fees and interest. Those with a very low credit score may also find that they’re restricted to very high interest consolidation loans that are rarely worthwhile.
What Other Options Are There?
You may be able to continue managing multiple debts by being strict with your weekly budget and by making cutbacks to your living. Calling up creditors and negotiating lower payments could help to make each debt more manageable. It’s worth aiming to pay off your smallest debt first and then working your way up to the largest debt. This is known as ‘debt snowballing’ – you can find more information about this strategy at Nerdwallet.
There may be debt relief programs out there that can help you negotiate payments with creditors and lower debts. There are even debt discharge services such as Debt To Success System that can wipe your debts. Is Debt To Success System a scam? Can I trust these services? It’s always worth doing your research, but most debt relief programs are legitimate and will help you escape your debts effectively.
Bankruptcy is often the last resort option when all others have been exhausted. If you cannot pay off your debts and you cannot apply for/have tried other options, declaring bankruptcy is still an option for getting out. You could lose assets such as your car and your home and your credit score will be severely affected, however your debts will be wiped.