Deciding Whether Debt Consolidation is Right for You

Consolidation combines debt from multiple sources into a single loan instrument with easier repayment terms. You’ll borrow to repay higher-interest sources, such as credit cards. Having only a single payment to make simplifies your repayment plan, and could reduce the amount you have to pay each month as well.

Here’s some information to help you decide whether consolidation is right for you.

When you replace your usual vehicle loan with a brand-new loan, the average age of your credit accounts will most certainly be reduced, New credit card refinancing vs debt consolidation also has little effect on your credit rating.

When Debt Consolidation Is The Right Choice

Debt consolidation may be right for you if:

  • You have a credit score rated good or excellent, which starts at 670. You could get consolidation loans with a lower credit score. But the interest rate would be high and the terms unfavorable.
  • Multiple high-interest sources of debt. If this is the case, the odds are good that consolidation will lower the interest you pay. This is particularly true if you have a lot of credit card, which usually has an interest rate rather higher than 10%. While loans tend to have interest rates of less than that.
  • You have the motivation to stick to a repayment plan. One of the problems with a credit card is that you can choose to pay off at any level you want. Which can keep you in forever if you stick to the minimum repayment amount.
  • You own a house with a low mortgage balance, you have a secure source of income, and are willing to use your house as security for the consolidation loan. Some consolidation companies offer cash-out refinance mortgages, which allow you to pay off your old mortgage and other debts in exchange for a new, higher mortgage.
  • You have a good credit score and qualify for a balance transfer card, which you could use to consolidate by transferring all of your outstanding onto the card. This is a particularly good option if you can get a zero-percent APR promotion and you can pay down the card balance quickly.

When Debt Consolidation May Not Be Viable For You

There are situations where you may need to look at other alternatives, such as. 

  • You have a less-than-good credit score, meaning under 670. You could get a debt consolidation loan with such a credit score, but it won’t be one with good rates.
  • Chronically overspend. If you can’t stop overspending, then consolidating you’re might just lead you to accumulate more, putting you in an even worse financial situation than when you started.
  • You have low levels of debt. If you can pay off your existing balances within the next year, the savings you get from consolidation probably won’t be worth the effort.
  • You don’t have the motivation to stick to a repayment plan.

The Takeaway

If all of this is a bit confusing, experts at a company like Freedom Debt Relief can help you decide if debt consolidation is right for you. After all, making a sound consolidation decision requires a bit of work. With that said, while consolidation can truly put you on a path toward a better financial future, it is not the best choice for everyone. However, if you discuss your goals with experts, take the time to assess your financial situation, and research the various consolidation options available to you, you could find an option that works amazingly well for you.