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Is Debt Consolidation Right For Me?

Written by Banks Editorial Team

Updated April 22, 2021​

2 min. read​

If you are in debt, you may find a way out through debt consolidation. Being in debt is scary: the growing anxiety, phone calls from credit companies, and a mounting pile of bills is the stuff of nightmares.

Addressing your debt and taking control of your finances is a difficult task. Many of us – even those who have amazing money-management skills – might struggle to keep track of their payments and fall further into debt. This type of loan can be an effective solution.

What is Debt Consolidation?

Debt consolidation refers to combining multiple debts in order to pay off a single debt at a lower interest rate. In addition to paying less, debt consolidation makes paying your accounts easier to manage. You’ll have a single payment instead of writing multiple checks every month.

Debt consolidation could offer a solution if you’re looking for a way to cope with high interest rates and pay off your loan’s principal amount as quickly as possible.

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What is the Difference Between a Debt Consolidation Loan and a Balance Transfer?

These are the two main ways to go about consolidating your debt.

A debt consolidation loan is a personal loan taken in order to pay off other debts. You can take out a debt consolidation loan from a bank or accredited lender. Alternatively, if you’re a homeowner, you could use your home equity to consolidate debt. Keep in mind, however, that your property will be used as collateral.

Of course, you still have to pay the debt off – but you can do so at a lower interest rate. You will also get the benefit of having a consistent or fixed monthly payment which can help you budget effectively and not worry about keeping track of fluctuating interest rates.

A balance transfer is specific to credit card debit and works by transferring all your credit card debt to one account. There are some amazing offers available due to competition between credit card companies. Some companies even offer an initial interest rate of 0% for up to two years.

The Downside to Balance Transfers

Balance transfers offer the same advantages as debt consolidation loans. You pay less every month, and save time and energy by issuing one main payment instead of several smaller ones.

But if you’re not careful, balance transfer deals could land you in more debt. You would need to take into account that after the initial period, interest rates will increase. Would you be able to pay off the bulk of the debt before the interest increases?

Also, you need to remember that credit purchases will not qualify for reduced interest rates. You could unwittingly start spending more when seeing that your monthly credit card payment is less than it was previously.

When to Consider Other Debt Management Strategies

Debt consolidation works best for people with relatively good credit ratings and financial management skills. With easier payments and lower interest rates, debt consolidation can help you out in a pinch. It is a good way to manage debt before more is accumulated. But in cases where your debt situation needs more attention it is best to see a debt counselor.

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