As if debt isn’t already stressful enough, trying to figure out ways to dig yourself out of it is worse…especially when creditors are constantly nipping at your heels.
There are various ways to wipe out your debt and to give yourself a fresh financial start, but one common way is through debt consolidation. There are different debt consolidation programs available, but in short, the process involves combining multiple high-interest debts – like credit card bills or student loans – into a single lump sum with a lower interest payment schedule.
If you have decent credit and a relatively manageable amount of debt, debt consolidation can be a fantastic option for you. Using this method allows you to simplify your schedule of payments, to keep track of the remaining principal balance, and in many cases, to reduce the stress of balancing and managing multiple accounts at once.
Types of Debt Consolidation
There are two primary ways to consolidate your multiple debts into a single, monthly bill:
- Obtain a 0% interest balance transfer credit card: This will transfer all of your debts onto a single card, allowing you to pay the balance in full during the promotional period.
- Score a fixed-rate debt consolidation loan: This option allows you to apply for a debt consolidation loan, use that money to pay off your debts, and then pay back the loan in installments over a fixed term.
You may also consolidate your debts by borrowing against your home equity or 401k. However, these options carry substantial risks and as such, are less common.
As in any scenario, selecting the best option for you involves considering your credit score, profile, and your personal financial goals, as well as your debt-to-income ratio. Regardless of which option you choose, here are five ways that debt consolidation programs can help you manage your debts and provide a fresh financial start.
Consolidating your Debts can Significantly Reduce Stress and Anxiety
Debt consolidation simplifies the process of organizing, paying, tracking, and managing your bills which, when you are already in debt, can relieve stress. If you’ve accrued thousands of dollars in credit card debt across different accounts, consolidating your debts can make it far easier to make your monthly payments. Instead of painstakingly tracking multiple deadlines, accounts, and accruing interest rates, you can instead make a single lump sum payment to your creditors.
Consolidation can Save you Money
Simply stated, debt consolidation can save you thousands in interest payments. The average credit card interest rates can range from 13% – 23% or more, but consolidating your debts can help you negotiate a lower rate. This means that more of your monthly payments will be applied to your principal balances, allowing you to pay off your debts more quickly.
You can keep your Accounts
When you opt to consolidate your debts, you don’t have to move your money around or close any accounts; you keep the same ones. Particularly if you work with an agency to devise a monthly payment schedule, rather than managing multiple accounts per month, you simply will make one monthly payment to your service provider. From there, the funds are disbursed to your creditors.
You can Pay Down your Debts Faster
Debt consolidation programs are typically short-term and as such, consolidation is a prime option for those who want to pay down their debt fairly quickly – typically in less than a few years. With most debt consolidation plans, the maximum payment schedule will not exceed 60 months. This allows you to pay your debts on a regular, compacted schedule without accruing more interest than necessary.
You can do it without Accruing more Debt
The beauty of debt consolidation is that you can – but you need not – take out additional loans in order to pay off your high-interest debts. Consolidation is an option that allows you to pay off your debts without accruing additional debt, which for those who are already knee-deep in consumer debt is an attractive option!
For many consumers, debt consolidation provides some hope of financial freedom. Take, for instance, a consolidation loan with a three-year term: This assures you will have your debts paid off in three years, one way or another. On the other hand, making minimum payments on a high-interest credit card debt for years on end could mean continually increasing interest that exceeds the principal balance – a challenge that can suffocate and overwhelm many consumers.