Understand Debt: Debt Consolidation
Becoming #debtfree is hell of a ride. That’s why we would like to introduce you to different methods in our Manage Your Debt series.
So, Let’s Meet Debt Consolidation 👋
If you’re handling numerous loan repayments each month, this might be something to look into. Debt consolidation allows you to merge different kinds of debt into one monthly payment. Debt refinancing is also an option, if you’re planning to only replace a single debt with more favourable terms like a lower interest rate or smaller monthly repayments.
Let’s find out if the process is suitable for your financial situation — as it is associated with benefits and drawbacks.
- Convenience — having all of your debts in one place is comfortable. With only one payment monthly, you can cover everything. That means no more confusion between the accounts, no more missed payments & super organized management!
- Smaller monthly payments — improving your monthly cash flow.
- Reduced interest rate — if you’re paying off debts with a higher interest rate, it is likely that you will save some money thanks to lower interest rates.
- Paying off debts sooner — if you manage to get a lower interest rate for your new loan, and keep the current payment similar — you can become debt free sooner.
Debt consolidation can lead to unhealthy habits. It can make you feel so good about your spendings, that you forget about the long-run consequences of overspending and continue on this path.
Don’t let this happen and create an action-plan to get back on track! Use debt consolidation as an important tool that helps you in becoming debt free. It can be a good servant, but a bad master. Don’t use this method just to make life easier for a few months! Make sure you’re not falling into another trap: getting deeper in debt.
Create Your Debt Overview 💰
Debt consolidation in a nutshell is paying out all of your smaller loans & debts by combining them into a new, bigger loan. Following these simple steps will help you get an overview of your situation:
- Create a table of all your debts.
- Add columns to each debt describing total owed amount, due dates & interest rates.
- Summarize the total of your debt owed. This will tell you how much you need to consolidate.
- Summarize the total of your monthly payments. This will let you compare the advantage of your debt consolidation loan.
- Usually, debt consolidations are distributed by banks, credit unions or other financial institutions. They can help you get more information about the process, conditions, interest rates and monthly payments.
- Compare your current monthly payments to the new consolidated loan. Thoroughly analyse your own financial situation and all of the pros and cons.
Usually, you need to determine whether paying smaller monthly fees is worth being in debt for a longer period or for a bigger payment altogether. This doesn’t have to be the case all the time, but we recommend to check details & impact (eg. on credit score) with your financial advisor.