Consumer debt reach a record high last year. According to a recent report from the financial sector, American households now collectively owe more than $13 trillion. Many of the families affected by this figure are trying desperately to break the cycle and find at least some level of financial freedom.
Looking at the Options
Dozens of strategies have been developed for getting out of debt, from the snowball and avalanche methods to bankruptcy. Debt consolidation is also an option. Though you can learn more about this solution via Debt Consolidation Loans.com, we’ll cover some of the basics here.
What is Debt Consolidation?
Debt consolidation involves taking out a loan and using it to pay off multiple unsecured debts. In turn, this eliminates numerous monthly outlays and replaces them with a single payment. Overall, the goal here is to pay out less each month and reduce the amount of interest to be paid over the long term.
Digging Deeper
This may sound like the perfect solution to overwhelming debt, and for some, it is. Of course, a number of factors come into play. Consider these aspects before deciding if consolidation might work for you.
- Type of Debt: Consolidation is only appropriate for unsecured debt, such as credit cards. More than half of Americans now have credit card debt based on a CNBC writeup, making this the most common reason for seeking out a consolidation loan. Personal loans and medical bills fall into this category as well. If mortgage payments are your primary concern, consolidation probably isn’t the best option.
- Interest Rates: In addition to type of debt, interest rates play a role in determining whether debt consolidation is a suitable solution. Interest outweighs principle in many cases, which means finding a loan with lower interest rates than the debts to be consolidated is crucial.
- Credit Score: Your credit score will be a factor in determining eligibility for a loan, how much money you’ll be able to borrow and applicable interest rates. Those with very good or exceptional credit scores are more likely to receive low interest rates than those in the fair or very poor range. In the event you don’t qualify for a low-interest loan, consolidation could cost a great deal more in the long run.
- Loan Terms: Term refers to how long you’ll pay on a loan. In some instances, consolidation loans come with extended terms. Though this usually makes for lower monthly payments, it could mean you’ll pay more interest over the course of repayment than you would’ve with your original debt even with low interest rates.
With debt consolidation, the goal is to find a loan with lower interest rates than the credit cards and other unsecured debts at hand. Doing so generally requires a relatively high credit score and stable borrowing history. Even then, it’s important to weigh the total cost of the loan against the amount you’d be paying over the long term as-is.
Bottom Line
Several debt relief solutions are available to those who find themselves burdened with overwhelming expenses. Each option is geared toward a specific set of needs and circumstances and won’t work for everyone.
Debt consolidation loans are designed to roll multiple monthly payments into a single one while helping save money on interest. If you’re considering this route and qualify for a loan, be sure to do the math. Should the financial aspects work out in your favor when compared to the debt already being paid, this may very well be the answer you’re looking for.
