In 2019, consumer debt in the US was rapidly approaching $14 trillion. That’s more than $40,000 for every man, woman, and child in the country.
Debt in itself isn’t a bad thing. Without debt, very few of us would be able to buy our own homes or drive a new car.
It’s when debt gets out of control that you need to worry. If you’re struggling to make repayments or just covering the bare minimum each month then you may be thinking about debt consolidation.
Is debt consolidation wise? Read on to learn more.
What Is Debt Consolidation?
Put simply debt consolidation is replacing multiple sources of debt with one single loan.
During the debt consolidation process you would take out a loan that covers all your outstanding debts. You would use the money from this loan to pay off those debts, leaving you with one large single debt remaining. That means you only have one repayment to make each month.
Whether or not debt consolidation will benefit you will depend on your personal circumstances.
When Is Debt Consolidation Wise?
Why would you want to do this? You still owe the same amount of money, so what are the benefits?
The first benefit is that it simplifies your repayments. If you have several loans you will have multiple repayments to keep on top of. These may come out at different times of the month and be for different amounts, making it hard to keep on top of your budget.
The most important benefit is that debt consolidation can save you money. If you have multiple debts the likelihood is that there will be a range of interest rates for those debts. Some of them will be higher, some will be lower.
If you can find a debt consolidation loan that is at a lower interest rate than your current debts, it means that you will save money. You will need to pay off less interest on the amount that you owe. You will also have lower monthly repayments, helping you ease the burden of paying off your debts.
When Is Debt Consolidation Unwise?
If you cannot find a debt consolidation loan with a lower interest rate than your current debts, then there is no real benefit to taking one out. You will end up paying more over the lifetime of your loan.
You may also be able to find a loan that has a lower interest rate but also has a longer repayment period. In this case, you may still end up paying more interest than you would have done on your original debts. Your monthly repayments will be lower, however, so you may feel this is a reasonable trade-off in order to reduce how much you need to pay each month.
Looking for More Tips and Advice?
Is debt consolidation wise for you? Hopefully, now you have a better idea of how to answer this question. You’ll need to do your research to see what loans are available to you and at what interest rates. You can then decide whether a debt consolidation loan is worth your while.
Are you looking for more tips and advice on everything from personal finances to running a business? If so, you’re in the right place. Feel free to take a good look around the site; we’re sure you’ll find something you love.