If you struggle with high-interest credit card balances or multiple debts, debt consolidation can seem appealing. By rolling multiple debts into a single new loan, you only have one monthly payment.
However, debt consolidation isn’t the right move for every situation. Let’s explore when it does (and doesn’t!) make sense.
High-Interest Debt
Financial services companies like Symple Lending agree that consolidating high-interest debt such as credit cards into a lower fixed interest rate loan can reduce your total interest payments. For example, if you have $10,000 in credit card debt at 19% interest, consolidating into a personal loan for the same amount at 9% interest would substantially reduce how much you pay in interest over the life of the loan.
Before consolidating, use an online calculator to estimate potential interest savings based on your specific debt amounts, interest rates and new loan terms. This helps you determine if consolidation makes sense financially.
Small Debts
On the other hand, debt restructuring experts also agree that consolidating smaller debts may not make financial sense. Say you have three credit cards with low balances, $1,000 each. The interest rate is lower, but the balances are small. Consolidating would let you close the accounts, but the cost savings may not justify the hassle. Leaving the accounts open and paying down the balances may be simpler.
Variable Income
If your income fluctuates, consolidation can provide payment stability. Consolidated loans often have fixed monthly payments. This can make repayment easier to manage than minimum credit card payments, which vary based on your balance. However, make sure the payment fits your budget, even in lower-income months.
When calculating an affordable payment, examine a few recent bank statements to determine your average monthly income after essential expenses. Also, build in a buffer for unexpected costs each month.
The Right Partner
The key is choosing the right lender for consolidation. Have a debt consolidation expert assess your situation and provide transparent guidance. They can also explain all fees and terms in simple terms, so you know exactly what you’re signing up for. Let them help you customize loan options to best meet your needs.
The bottom line? Debt consolidation can be a smart money move, but only under certain circumstances. It’s best for high-interest debt where interest savings exceed fees. However, alternatives like balance transfer cards may provide lower rates. Consider your unique financial situation and consult qualified financial experts to determine if consolidation is your ticket to becoming debt-free.
