5 Questions to Ask Yourself About Debt Consolidation

Finding yourself burdened by debt is a common struggle experienced by many Americans. In fact, about 340 million people in the United States share about $16.9 trillion in debt. While it can feel validating to know you’re not alone, that doesn’t help solve the issue.

One solution that can help ease the financial burden of debt can be to consolidate it. It can be confusing and costly to have multiple debts: More than one interest rate can cost you a significant amount of money over time, different debts with different due dates can cause disorganization and forgotten payments, these debts can cut into your monthly budget for other necessities including mortgage or rent payments, groceries, utilities, car payments and more.

With debt consolidation, you may be able to save money and reduce disorganization. However, it’s important to understand what kind of questions you need to ask yourself before deciding to consolidate your debt. Learn more about these questions and their answers below.

How does debt consolidation work?

Debt consolidation refers to combining multiple loans into one payment. You can do this in many ways, including taking out a personal or home equity loan, and then paying off the smaller loans with your new one. The new loan would ideally have more favorable terms, including a potentially lower interest rate and smaller monthly payments, which may be able to simplify and decrease your debts considerably.

What are the benefits of debt consolidation?

Rolling your debt into one payment can help you pay off multiple outstanding balances at one time. This can also help you save money since you won’t be paying multiple interest rates on multiple debts, and the new rate would also often generally be lower than your original rates. You may also be able to have stable payments since your interest rate and monthly payment may be able to stay the same every month, enabling you to budget better for other expenses.

Debt consolidation can also help you organize your finances better, allowing you to consolidate due dates so you are less likely to miss any payments with different due dates. You’d also only be paying one lender, so it may be less likely for you to forget who exactly you owe.

Is there a good time to consolidate my debt?

There are a couple instances in which it may be a good time to consolidate your debt. If you’re paying a significant amount each month for any of your debts due to high interest rates, it could be a good idea to consolidate to potentially get a lower rate.

You also may want to consider debt consolidation if you still have many payments left to pay off your debt. It could be worth it to consolidate to potentially benefit from a lower interest rate and payment for a longer time.

What costs should I expect with debt consolidation?

The costs of your debt consolidation depend on how you choose to handle your consolidation.

If you’re taking out a loan to consolidate your debt, you need to consider the loan interest, which is typically lower than your original rate, and an origination fee which often comes with most loans.

If you choose to consolidate your debt by opening a new credit card, you should be aware of any annual fees, balance transfer fees and credit card interest.

No matter which strategy you choose to take, these costs greatly depend on your own personal situation. Make sure you speak with a professional before you decide.

What kind of debt consolidation solution should I take?

Every person’s circumstance and situation are different from one another, so the kind of debt consolidation solution you decide on is dependent on your own needs and eligibility. Each solution has its benefits and drawbacks, so you’ll need to understand what may or may not work for you.

Taking out a loan could offer you fixed and predictable interest rates and monthly payments, but you may need to pay origination fees and closing costs. On the other hand, credit card balance transfers generally have low interest rates as well but those may end after a fixed amount of time, so you’ll need to be aware of this cost and how much it may add up to.

You’re Not Alone

There are many factors to consider before you decide to consolidate your debt. But one thing you must remember is that you may have solutions to help you. It can be scary to feel like you’ll never be able to escape your financial burdens, but with a little research, working with a professional and understanding your own financial goals, you may be able to find a solution that can help you lighten the load.

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.