Debt consolidation can seem like a great way to streamline your payments and make them more manageable. However, if you don’t do it for the right reasons and you don’t create a strategy to get out of debt, you’ll find that consolidating your debts will be of little help.
What is Debt Consolidation?
Debt consolidation involves combining multiple loans – medical bills, payday loans, and credit card debts – into a single loan. Ideally, for debt consolidation to work, the new loan should have a lower interest rate and lower monthly payments as well.
Debt Consolidation Truths You Need to Know About
- Your interest rate may not stay low: Although your new loan may have a low-interest rate in the beginning, it may not stay that way in the long-term. This is especially true for balance transfer credit cards that have 0% APR during the promotional period. Post completion of this period, you are charged high interest on any balance that remains on the card, which could again make it difficult for you to repay the remaining balance.
- You may end up being in debt longer: In your rush to make your monthly payments more manageable, you may take up a new loan that has a lower monthly payment, but a longer loan term. The longer loan term could lead to you paying more interest over the course of the loan term, which essentially makes your new loan more expensive. So, if you do decide to consolidate your debts, make sure to pick a loan that has a short loan term as well, so you are able to save on interest payments.
- Debt consolidation does not eliminate your debts: Remember that debt consolidation can help you manage your monthly payments, but it doesn’t wipe out your debt completely. You still owe the lender the same amount of money, but you pay one bill, instead of several.
What this essentially means is that consolidating your debts alone does not change your current behavior with money. While debt consolidation can work as the first step, it’s important to change your spending habits as well so you can pay off your debt and not incur any new debt.
