If you’re struggling to keep up with your monthly payments, you may be considering debt consolidation. This process involves combining all of your debts into a single loan, which has a lower interest rate and more manageable monthly payments. But does debt consolidation really work? And is it the right option for you?
What’s Debt Consolidation?
As we’ve just touched on, debt consolidation is the process of combining all of your outstanding debts into a single loan. This can be done through a personal loan, balance transfer credit card, or home equity loan. By consolidating your debts into a single loan with a lower interest rate, you’ll have one monthly payment to make instead of several.
What is the idea behind debt consolidation? The idea behind debt consolidation is that it will save you money in the long run. By consolidating your debts into a single loan with a lower interest rate, you’re effectively reducing the amount of interest you’ll pay on your outstanding debts. In turn, this can help you save money and pay more of the loan off.
Rather than paying interest on five different loans, for example, you pay it on one. Therefore, you end up paying more of the owed capital back rather than simply interest payments. If you’re lucky, you can even get a loan with an initial lower interest rate that helps you save in the short term as well. In fact, some offer a no-interest welcome period.
Before moving forward with debt consolidation, however, it’s important to be aware of the potential risks. First, you’re increasing the length of time it will take to repay your debt. Second, if you consolidate your debt with a home equity loan, you’re putting your house at risk should you default on payments. Finally, debt consolidation doesn’t always address the underlying issues if you can’t afford repayments.
If you can overcome these potential problems, debt consolidation can be an effective way to reduce your monthly payments, save on interest, and become debt-free. Talk to a financial advisor to see if it’s the right route for you.
How Does Debt Consolidation Work?
So, what about the logistics of debt consolidation? How does it work, and what type of debt can you consolidate? To start, you’ll work with a company like Cashify to evaluate your options and find a consolidation plan that works for you. There are two types of debt consolidation: secured and unsecured.
With secured debt consolidation, you’ll use an asset as collateral to secure a loan. The most common type of secured debt consolidation is a home equity loan or HELOC, which uses your home as collateral. If you default on the loan, the lender can foreclose on your home. Because of this risk, home equity loans tend to have lower interest rates than unsecured debt consolidation loans.
On the other hand, unsecured debt consolidation loans don’t require collateral, but they tend to have higher interest rates than secured debt consolidation loans. With an unsecured loan, you’ll likely have a fixed interest rate for the life of the loan.
If you’re struggling to make monthly payments on your debt, the company will essentially lend you the money to pay off all other debts. Now, you owe this one company the whole amount rather than five or six different creditors. In theory, this should make it easier to stay on top of debt because you only have one payment to make each month.
Why not explore debt consolidation? It could be the answer you’ve been looking for this year.