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Life can feel like a balancing act, from managing your work to spending time with friends and family. However, simplifying your debt payments is essential. A recent report suggests that total American household debt increased by US$93 billion in Q4 2024, reaching US$18.04 trillion. That’s where debt consolidation comes into play: organizing your debt so you can focus on what matters most.
In this article, we will explore some of the fundamentals of debt consolidation for individuals and businesses while debunking some myths surrounding it. Let’s dive deep to clarify your financial solutions and secure financial stability.
Debt consolidation is the process of combining several debts into a single monthly repayment plan to simplify payoff. A common form of debt consolidation is obtaining a loan, where the new loan amount matches the total of your existing debts. In other words, your new loan equals the sum of your current debts. Since loans typically offer more forgiving interest rates than most types of debt, a debt consolidation loan can save you a significant amount in interest over time.
The best time to consider using a debt consolidation loan is when you want to reduce the interest rates on multiple credit cards. To accomplish that, let’s understand how debt consolidation works.
When consolidating debt, a person takes out a large loan that encompasses all smaller loans. However, this single loan may incur additional fees, extend the repayment period, and carry higher interest rates. The first step in securing any debt consolidation loan is to determine how much consolidation is needed for the debt.
Let’s illustrate this with an example of consolidating credit card debts, showing the following balances and annual percentage rates (APRs):
If you continue to make minimum monthly credit card payments of US$218.33, it will take a staggering 23 years to pay off your financial balance. Now, imagine you are eligible for a US$8,000 debt consolidation with a 24-month term plan at 10% or a 60-month term at 12%. Both options enable you to save on interest and become debt-free.
Debt consolidation loans often have minimum payments and, in most cases, save you from financial consequences. There are several ways to consolidate your debt, and it primarily depends on your specific financial circumstances.
The types include:
Debt consolidation is certainly a neat solution to repay your debts. However, certain aspects need attention before you take the plunge.
The process of debt consolidation is similar to that of getting a personal loan. However, it has a few extra steps, which are as follows:
Record the current balances of all your credit cards, unsecured loans, and other debts that require consolidation.
Compare short and long repayment terms to assess the best payment options. Unlike credit cards, debt consolidation does not offer a minimum payment option, so it's important to ensure that the payment is affordable.
At this stage, it is necessary to gather all the information in advance. Depending on the lender, you may have access to funds on the same day, and a longer waiting time to pay off debt leads to the accumulation of more interest.
Also read: Debt Consolidation Loan Strategies for Poor Credit
It is important to understand that debt consolidation involves taking a new loan, and the loan application process itself can affect your credit scores.
Here are some of the pros and cons of debt consolidation:
Also read: Understanding How Debt Consolidation Works: Pros and Cons
Credit card rates average about 20%; however, consolidation loans provide significantly lower rates for qualified borrowers. Consolidating debt isn’t a one-size-fits-all strategy; therefore, evaluating the circumstances and goals to determine whether it is the right move depends on the following factors.
Nowadays, lenders are cautious about interest rates due to uncertainty surrounding consumers' financial resilience and rising inflation. Experts believe that credit card rates will remain high in the near future, emphasizing the need for debt counseling services.
The straightforward truth about debt consolidation is that it serves as a financial strategy for individuals aiming to manage their credit card debt. Is it beneficial or detrimental? That is for you to determine, but let us clarify some of the misconceptions surrounding debt consolidation.
The Truth: Debt consolidation and debt management plans are similar; however, they have key differences. When consolidating debt, borrowers take out loans and repay funds to pay off their creditors. Debt management plans do not involve loans and are a separate program of credit counseling agencies.
The Truth: Debt consolidation can improve your credit score over time. It also assists in paying down high-interest credit card debt, which lowers your credit utilization ratio. Consistently making on-time payments can reduce your overall debt and help you recover your credit score.
The Truth: Debt consolidation can simplify your payment plans. However, it won’t make a difference if your spending habits remain unchanged. Addressing the root cause of your debt can help you become debt-free over time.
The Truth: The primary purpose of a debt consolidation loan is to save money. However, having multiple credit card debts can negatively impact your credit score, resulting in higher interest rates. A debt management plan is the most effective way to lower your interest rates, regardless of your credit score.
The Truth: Managing debts can be overwhelming. However, end-to-end support makes all the difference. Professional guidance can help you streamline your debt consolidation processes and keep track of your business.
If you are uncertain whether debt consolidation is the right choice for you, consulting a knowledgeable financial advisor or a reputable debt management company is wise. Shepherd Outsourcing Services can help you assess the best options for debt management and develop a customized debt consolidation plan that aligns with your business objectives.
Half of Americans with debts report difficulty managing at least one type of debt. Additionally, 60% of those with high levels of credit card debt report similar struggles. Consolidation is not just the only option for debtholders looking for relief.
Here’s a rundown on some other alternatives:
Managing multiple debts can be overwhelming. However, with careful consideration and an effective debt management strategy, you can maintain a healthy credit score.
A systematic approach is essential for an effective debt consolidation loan. While appropriate consolidation can simplify your payment options and lower interest rates, it requires proactive planning to avoid issues such as extended repayment terms. By thoroughly assessing your financial situation, you can determine whether to pursue debt consolidation. Additionally, exploring alternatives such as debt management plans can offer valuable insights into your financial standing.
If you seek expert guidance for debt consolidation, Shepherd Outsourcing Services offers tailored solutions that can help you achieve financial freedom. Contact us now to explore the best debt management strategies for your financial needs.
1. Do debt consolidation loans hurt my credit score?
Debt consolidation can both help and hurt your credit score simultaneously. Initially, it may decrease due to a hard inquiry. However, consolidation can enable you to manage your repayments effectively, positively impacting your credit score over time.
2. How do I qualify for a debt consolidation loan?
The higher the income, the greater the chances of approval. Creditors may also take into account the percentage of your monthly income that goes toward existing debts, known as the debt-to-income (DTI) ratio. Most creditors favor a DTI of 40% or lower.
3. Is it expensive to consolidate debt?
Debt consolidation loans may include organization fees, which usually range from 1% to 10% of the total loan amount and are factored into the loan’s APR.
4. Are debt consolidation loans only available for credit card debts?
No debt consolidation loan can merge different kinds of unsecured debts, including personal loans, medical bills, and credit card debts.
5. Is it better to consolidate or settle debt?
Debt consolidation is a better option if you have a solid credit score. Conversely, debt settlement is preferable if you are behind on payments and have a poor credit score.
©2024 by Shepherd Outsourcing.