Have you ever felt like your debt situation is never going to get better? Or that you are struggling to pay for your basic necessities, yet find yourself further and further in debt, month after month? It may feel as though you will be in this helpless situation for the rest of your life, but the truth is that there are hardworking people who are trapped by debt and looking for a way out, but also many people that have successfully changed their financial lives. An option that many consider when in debt is debt consolidation, but is this the right option for you? It’s important to understand exactly how a consolidation works before jumping in.
High Level Overview of Debt Consolidation
So, what exactly is debt consolidation? On a high level, debt consolidators are private corporations that aim to consolidate all types of loans into one “easy” payment for each customer. They advertise benefits such as lower monthly payments, longer-term payment options, and a more convenient, stress-free ride to debt pay down. There are a few very important points regarding debt consolidation that you should understand before opting to sign that dotted line.
1) Debt consolidation may likely mean higher overall debt amounts
Although it is true that many debt consolidation providers will offer lower monthly payments, these payments are usually distributed over longer periods of time, so that the total debt owed actually becomes much higher.
2) Your interest rate will not likely be lower; it will likely be higher
Many people see debt consolidation advertisements online or on TV, and believe that debt consolidation providers are there to help and support them. However, it is important to remember that they are corporations seeking to earn profits, just like any other company. Therefore, they will charge you an interest rate for consolidating your loans, and because the payment period will be longer, the effective interest that you pay will likely be higher than before. This point holds especially true during periods where interest rates are at all time lows, because the majority of your consolidated loans will carry floating interest rates. This means that, as overall interest rates rise, your loan will become more expensive.
3) After you consolidate, you’re still in debt
This may sound like a very obvious point, but the truth is that many people feel relieved when they consolidate their debt and forget that debt consolidation is only a simplification solution, and not a long-term problem solver. It’s much more important to set a plan in place to lower the amount of debt you owe over time, and change your habits and mindset going forward.
Potential Benefit of Debt Consolidation
The only potential benefit of debt consolidation is having peace of mind knowing that all of your loans are in one place. However, it is important to note that this only makes sense IF the consolidation does not cost you more in interest or extra fees, which is not usually the case. Do your diligence here, and if the consolidation will not cost you more, then it may give you peace of mind knowing that you have one monthly payment with one creditor.
The Real Way to Fix Your Debt Problems
In reality, no corporation can help you with your debt problems; help needs to come from your internal mindset and actions. You need to develop a mindset that caters to paying off debt and building wealth. For instance, it may be nice during the holidays to spend some extra money for gifts, but, if you are in debt, some of your money should go toward paying off your debt first. Additionally, having a budget that sets a specific amount of debt that you will pay off each month is very helpful. Taking real actionable steps like this will help you get out of debt, save, and build wealth over time. There is no doubt that it will be difficult, but with enough hard work, anyone can change his/her financial future for the better!