Bills can spur a great deal of anxiety – especially when they represent a seemingly insurmountable pile of debt.
If you’re struggling to make payments to multiple creditors at various amounts on different dates throughout the month, you’re likely feeling the pressure. Debt consolidation and the promise of wrapping each debt into one predictable monthly payment might seem like the perfect solution to your potential financial burnout. And for some, it can help a great deal.
But financial stumbling blocks like these don’t always have a one-size-fits-all solution and may require some careful deliberation on your part. Before you head down the debt consolidation path, make sure to ask yourself these questions.
If you do decide to try debt consolidation, be sure to check out the ReadyForZero debt consolidation tool.
Question #1: Have I addressed the underlying issues that created the debt?
First and foremost, have you stopped the financial bleeding that caused the debt in the first place? If, for instance, credit cards are your kryptonite, have you stopped charging? That is step #1.
In the majority of cases, sizeable consumer debt is created over a long period of time and is really just the physical symptom of a pattern of bad habits and emotions that haven’t been attended to.
The debt you’ve accumulated may have been the result of money habits you latched onto from your parents, a lifestyle that quickly spun out of control, a need to fill an emotional void with “stuff” — or any variation on a variety of deeper issues.
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Whatever the case may be, that is what needs to be addressed before prescribing the solution to the symptom. If you move ahead with a debt consolidation plan without working on the cause of the debt first, you are setting yourself up for a lifetime of simply spinning your wheels.
In addition, it’s important to be aware that some plans may require that you agree to stop applying for new credit or using existing credit while you’re in the repayment process (something that could potentially take years).
Question #2: Is my debt eligible for consolidation?
Not all debts are considered equal, and not all debts can be consolidated.
There are two main types of debt: secured and unsecured. Examples of secured debt include your mortgage and car payment – debt that is backed by collateral (your house or your car). While these debts can potentially be refinanced at a lower interest rate, they can’t be included in debt consolidation.
On the other hand, debt such as credit cards, utility bills, medical bills, or student loans are considered unsecured debt and are eligible to be consolidated.
What type of debt are you struggling with? If your secured debts are your biggest point of contention, you’ll need to look for other solutions.
(Important to note: The term debt consolidation is loosely used to describe the process of a 3rd party purchasing your debt which you in turn pay off. In some cases this means taking a loan out which may use your home as collateral – thus taking an unsecured debt and making it a secure debt. Whatever the plan may be, make sure you fully understand what you’re getting into.)
Question #3: Is this the best financial solution both short term and long term?
When it comes to making financial decisions, many of us (or perhaps most of us) tend to choose the path that places the least amount of strain on us now – despite the probability of regret down the road.
Debt consolidation can be extremely attractive if it promises a lower monthly payment now. But that lower monthly payment could carry with it a higher interest rate, which will actually ensure that you’re strapped with debt for longer than you would have been otherwise.
For instance, if you’re struggling with medical bills that have a low interest rate and credit cards with an exorbitantly high interest rate, in the consolidation process the low interest debt could be grouped in with the high interest debt. In turn, this could potentially mean you’re paying more for that medical debt in the long run.
It’s important to look at total cost over the lifetime of the debt consolidation plan including interest and any fees that may be incurred. Only after a (very) thorough comparison of the numbers pre and post debt consolidation can a sound financial decision be reached.
Debt consolidation can be a viable option if you’ve addressed the underlying cause of the debt, stopped the spending, evaluated the types of debt you’ve incurred and their eligibility to be consolidated, and compared your options.
Be aware, however, that not all debt consolidation companies are reputable, and finding one that keeps your best interests front and center is key to ensuring you aren’t promised something that the original creditor doesn’t even allow.
If you need help sorting through the haystack, check out this article: How to Find a Reputable Debt Consolidation Company or try the ReadyForZero debt consolidation widget without impacting your credit score.