People fall into debt for many different reasons. And that is exactly how it feels, like “falling.”
One day you finally take a clear-eyed look at your finances and discover you are in a deeper financial hole than you ever thought possible…
This realization can be scary. Perhaps your debt includes high-interest credit card or loan payments. For many people, the first step they take is simply to begin making payments.
While this is a fine approach with standard debt that is below, for example, 10% interest. When you are dealing with high-interest debt 18% or even higher, you should consider other options—otherwise, you end up making a monthly payment for a very, very long time and will, in the end, wind up having to pay back far more than you ever took out.
What is Debt Consolidation?
Debt consolidation is the process of combining all of your unsecured debts into a single monthly payment.
This can be done with a debt consolidation loan from financial service companies like Morgix. The loan is used to pay off your debts, then you pay off the new consolidation loan rather than dividing your payments to different creditors at varying interest rates.
You may be able to take out a debt consolidation on your own using a home equity loan or a debt consolidation loan from a bank.
Debt consolidation is, in other words, the combination of several unsecured debts—payday loans, credit cards, medical bills—into one monthly bill with a lower interest rate, lower monthly payment, and simplified debt-relief plan.
Debt Consolidation Methods
There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill. However, in most cases, you will usually need either good credit or some type of collateral to qualify.
The best option for you depends on your credit score and profile, as well as your debt-to-income ratio. All of these things are typically considered when you are taking out a debt consolidation loan. But, if you have a burdensome amount of high-interest debt and are struggling to make your monthly payments, debt consolidation may be right for you.
Should I Consider Debt Consolidation?
Usually, success with a consolidation strategy requires the following:
- Your total debt excluding mortgage doesn’t exceed 40% of your gross income.
- Your credit is good enough to qualify for a 0% credit card or a low-interest debt consolidation loan.
- Your cash flow consistently covers payments toward your debt.
- You have a plan to prevent running up debt again.
Here’s a scenario when debt consolidation makes sense: Say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You might qualify for an unsecured debt consolidation loan at 7% — a significantly lower interest rate.
For many people, debt consolidation reveals a light at the end of the tunnel. If you take a loan with a three-year term, you know the debt will be paid off in three years — assuming you make your payments on time and manage your spending. Conversely, making minimum payments on high interest credit cards could mean months or years before they’re paid off, all while accruing more interest than the initial principal.
Understand that Debt Consolidation Does Not Eliminate Your Debt
After consolidating your debt, you may feel a weight has been lifted from your shoulders. However, it’s important to remember that you still have the same amount of debt as before. Now, instead of having multiple accounts to pay, you have just one. This may ease the stress of managing multiple payments, but it doesn’t mean your debt has lessened. Though lower monthly payments are always nice…
Pros and Cons of Debt Consolidation.
Debt consolidation is generally beneficial only when the final consolidated debt has a lower monthly payment or interest rate, or both. While this makes it much easier to afford your monthly debt payment, it’s often achieved by lengthening your repayment period. You’ll ultimately end up paying down your debt longer than if you’d left your debt unconsolidated. The longer repayment period also means you’ll also pay more total interest on your debt.
Consolidation isn’t a silver bullet for debt problems. It doesn’t address excessive spending habits that create debt in the first place. It’s also not the solution if you’re overwhelmed by debt and have no hope of paying it off even with reduced payments.
If your debt load is small — you can pay it off within six months to a year at your current pace — and you’d save only a negligible amount by consolidating, don’t bother.
Debt Consolidation Versus Debt Settlement
There’s a huge difference between debt consolidation and debt settlement, although often the terms are used interchangeably.
As mentioned, debt consolidation is a type of loan that rolls several unsecured debts into one single bill. It can be a life saver.
Debt settlement, on the other hand, means you hire a company to negotiate a lump-sum payment with your creditors for less than what you owe.
Debt settlement companies also charge a fee for their “service.” Often, the fee is anywhere from 15–20% of your debt. In most cases, debt settlement should be avoided in favor of debt consolidation or some other method of getting your finances under control.
Here are the top things you need to know before you consolidate your debt:
- Debt consolidation is a refinanced loan with extended repayment terms.
- Extended repayment terms mean you’ll be in debt longer.
- A lower interest rate isn’t always a guarantee when you consolidate.
- Debt consolidation doesn’t mean debt elimination.
- Debt consolidation is different from debt settlement. Both can scam you out of thousands of dollars.
Other than that, remember that debt consolidation is not a magic bullet, or simply an eraser that gets rid of all your debt. It is, instead, an effective tool for managing your monthly loan payments and helping you get your financial house in order. The main benefit can simply be increased monthly cash flow, and that can sometimes be all you need to feel a meaningful impact on your monthly finances.
Talk to Morgix Mortgage Solutions about debt consolidation and other financial services to help put more money back in your pocket, each month.
Contact Morgix Mortgage Solutions