What Is Debt Consolidation?
Say you’ve got debt from the financing of a vehicle, debt from a college loan, and a few thousand dollars in credit card debt to contend with. Each of those debts will have a certain level of interest. So maybe on the college loan, you’re at 2.5%, 3% on the car loan, and 1.8% on the credit card loan. Now let’s say all those loans together, prior interest, come to $50,000.
When you add 2.5%, 3%, and 1.8%, you get 7.3%. When you take 7.3% or $50,000, it comes to $3,650. Now just for the sake of illustration, in this writing, we won’t compound that number or make any adjustments based on incremental payments. The point here is to demonstrate how much money in addition to actual debt is being paid via interest.
When you consolidate your loans, instead of paying three separate interest payments every month, week, or year (however the terms of your debt are defined), you combine all that debt into one payment. So instead of 2.5%, 3%, and 1.8% on each loan, now you’re paying, say, 3% interest through the consolidation agency.
Essentially, that agency pays off your debt with your creditors and becomes your new creditor. They make a profit through interest as well, but you lose less money because now you’re paying one monthly payment at diminished overall interest; allowing you to pay off the debt quicker at less cost. With that in mind, this writing will further explore debt consolidation.
There are different consolidation options through different debt consolidation agencies. Some will be a huge help, others keep you in debt longer. Finding your best option will require shopping around; but beyond that, you need to explore what they’re offering against what you owe to see what the best deal is.
Just because a consolidation agency is offering a low-interest rate doesn’t mean you’ll benefit. First, how far away are you from paying off certain debts? If you can aim energy at small debts and pay them off, that saves you money over combined consolidation.
Second, will the new interest rate offered by a consolidation agency be less than the combined interest on your existing loans? Sometimes that may not be the case.
Advising Yourself Through Resources And/Or Consultation
In order to make the best possible choice in this area, and avoid accidentally expanding your debt burden, you want to seek advice from qualified financial professionals. Ask friends and family who have been in debt, and overcome it. They can help save you time and money.
That said, either because you don’t have such contacts, or said contacts don’t understand either, you might want to seek additional consultation. One option many contending with a debt of varying size have used to help inform their consolidation choice is DebtBusters.com.au.
Through this group, you can determine what’s best for you where you’re at, and whether or not consolidation would be the wisest choice. Everyone’s situation has its own unique qualities, so choose carefully here.
Getting The Most From Available Debt Consolidation Options
Whenever you’re in debt, your wisest choice will always be to get out from under that debt in whatever legal, sensible way you can. It’s no good using one credit card to pay off another; that just transfers the debt. However, owing to how interest works, consolidation can actually reduce your overall financial burden over the long-run.
So learn to understand what debt consolidation is, explore the options that are available to you, and assure you don’t neglect proper advice from the right people. Follow these steps and you’ll be able to determine if consolidation is right for you, and from there, what the best options are for your situation where you happen to be.