Here at ReadyForZero, we work to provide you with the tools to help you pay debt off faster, on your own. However, there are times when you can boost your debt payoff plan even more by obtaining a debt consolidation loan. This allows you to potentially obtain a lower monthly payment, a lower interest rate, and to combine multiple debt accounts into one – which can have a big impact on your mental state as you work to pay down debt.
But a debt consolidation loan isn’t a cure-all. Debt consolidation is just another tool that can help you if you take the other steps necessary to pay off your debt. This post will talk about how to pay off a debt consolidation loan and reach your goal of becoming debt-free.
Debt Consolidation, In a Nutshell
There is a lot of confusion and misinformation around debt consolidation. Bluntly speaking, debt consolidation is the simple act of paying off one or more debt accounts with a new debt account. The idea behind this is to a) obtain a lower monthly payment than you would pay on each individual account combined b) obtain a lower interest rate than you have on each individual account and c) give yourself mental freedom by having only one account to pay.
The misinformation on debt consolidation pops up when you try to find out how to obtain this kind of loan. A debt consolidation loan is just that – a loan. You don’t need a special type of company to do this for you. You can seek out a debt consolidation loan in a number of ways: through a new credit card with a balance transfer option, a home equity loan, or even a peer-to-peer loan. But when you search for debt consolidation, you may find companies to help you that actually focus on debt settlement or debt management. These are not the same thing.
Debt settlement and debt management are when someone negotiates with your lenders to lower your rates or even your total amount due – but this can come in the form of putting your payments in escrow rather than paying your lenders right away which can negatively impact your credit score. A true debt consolidation loan instantly pays off your other loans and keeps you in good standing.
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When Debt Consolidation Doesn’t Work
Just like other methods of debt payoff, addressing the math isn’t good enough – although it is an important start. At the end of the day, you need to think about what got you into debt in the first place. It could have been an emergency or a series of events that couldn’t have been avoided, a lack of understanding of how to manage your money, or simply not managing your money. There are also many emotional reasons – such as a desire to keep up with your peers or spending to fill a void. No matter the reason, there are many emotional barriers to overcome in order to pay off debt – and just as many to overcome to stay out of debt.
By starting off thinking about how you got into debt, you’ll understand the necessary steps to pay it off and never have it again. For example, if unforeseeable circumstances plunged you into debt, then perhaps saving for a solid emergency fund is what you need. Or, if you had a lack of understanding of your finances (or lack of managing your finances at all), then a budget will be the key to keeping you on track in the future. Finally, if you acquired debt due to emotional reasons, then you’ll want to address the source of those feelings and a solution for them.
For most of us, a combination of budgeting, building an emergency fund, and finding out how to avoid emotional spending is what’s necessary to pay off debt and avoid accumulating it in the future. However, there’s no one size fits all solution so taking the time to evaluate your specific situation will make all the difference.
Paying Off Your Debt Consolidation Loan
After understanding why you went into debt and how you can prevent it in the future, you’ll want make sure you focus on using your debt consolidation loan to pay off your debt, not simply lower your monthly payments. If you obtain the loan simply to lower your monthly payments, then that won’t be as helpful to pay your debt off faster as using the money saved to apply back to your debt. Of course, sometimes we need to take on these loans simply to afford our debt payments and that is a different situation. But if you can afford the payments you were making, then it’s best to continue paying that amount on your new loan.
One thing to note is that if you’re using a close-ended loan like a peer-to-peer loan or a home equity loan, then you will have a fixed payoff date. At the very least, if you can’t make more than the minimum payment, you know when you’ll be debt-free and don’t have to worry about a revolving balance. However, if you’re taking on a balance transfer on a credit card to pay off your debt, then you now have a new debt which doesn’t have a fixed payoff date and the interest rate is usually promotional (and could expire prior to paying off your balance). Plus, you could still theoretically add more to your balance since it is a credit card that you can swipe at will.
Thus, credit card balance transfers may be a harder type of debt consolidation to pay off than a loan, although they do come at lower interest rates. When deciding how you’ll want to consolidate your debt, think about your finances realistically. If you think you’ll be tempted to use the credit card – or if you think you can’t pay off the balance before the promotional interest rate expires – then it might be better to obtain a loan instead. Otherwise you could end up in a cycle of paying off one balance transfer credit card with another without ever making a dent in your debt.
It can’t be stressed enough that paying off debt is as emotional as it is mathematical. That means you have to weigh your options carefully before taking on things like a debt consolidation loan to pay off your debt. It’s also important to always be thinking of not just how to pay your debt off faster, but how you can ensure that you never have to have debt again. Only then will you truly obtain financial freedom.
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