In 2015, a Pew Charitable Trust survey revealed that 80% of Americans were carrying some form of personal debt.
For some people, debt consolidation is the silver bullet that can transform chaotic months spent juggling debts into a smoother and more straightforward financial lifestyle.
But should you pursue it? Is it right for your financial situation?
If you came here looking for a personal finance tip on debt consolidation, you’re in luck. We’ll tell you what you need to know. All you have to do is keep reading.
The Three Situations Where Debt Consolidation Could Make Sense
Scenario 1: Most of Your Debt Is High Interest
Certain types of debts are notorious for having sky-high interest rates.
For instance, credit cards have an average interest rate of 14.5%.
And once your interest rate is in the double digits, your monthly payments have to become a lot larger in order to make a dent in your actual debt.
Debt consolidation makes it possible for you to combine all of your debts into one, generally lower-interest loan. That factor alone can make it easier to pay down debt faster.
Scenario 2: You Have a Solid Credit Score
If you’re just learning finance and budgeting, we’re about to let you in on the worst-kept secret in finance:
Lenders love loan applicants who have strong credit scores.
If you have a good credit score, they will not only fall all over themselves to approve you, but they’ll go out of their way to give you excellent terms. And those “excellent terms” will almost always include the lower interest rates that make debt consolidation such an attractive option for managing debt.
Scenario 3: You Want to Simplify Your Financial Planning
There’s nothing more awkward than having to keep a calendar running to let you know when your various payments are due. In addition, the whole, “Can I afford to do this if I’ve got a bill coming out in two days?” shuffle just isn’t anyone’s idea of a good time.
Almost every personal finance course you can take will tell you about how important it is to keep your financial planning simple. Debt consolidation allows you to do exactly that.
The Biggest Downside of Debt Consolidation
The truth about debt consolidation is that it’s the Goldilocks of personal finance. Your debt can’t be too big and it can’t be too small.
If your debt is so big that you’re in financial freefall, consolidation may not be possible because you might not qualify for the loan amount you need.
If your debt is so small that you’re getting set to pay everything off next week, it’s not worth your while to go through with a consolidation. What exactly is “too big” or “too small” isn’t a set dollar amount, however. It’s about the proportion of the debt relative to your income.
The Finance Tip That Could Change Your Relationship With Money
For better or for worse, the success of your debt-free journey ultimately comes down to studying personal finance topics and taking the time to really learn finance.
Debt consolidation is no different.
On that note, here’s a finance tip that might help you with your decision if you’re new on your debt-free journey and you’re just getting the hang of understanding finance:
Consider getting in touch with top rated debt consolidation companies who can explain the process to you.