According to one study, 26% of Americans carry debts and struggle to pay them off on time. Unfortunately, they don’t carry one debt but multiple ones, making it more difficult to fully repay them on time. 

This is where we usually hear the term “debt consolidation.” For some, consolidating debt is like a saving grace. It’s like an extension. It’s a chance for every borrower to extend the repayment plan and, if the odds are in their favor, a little lower interest than they originally had. 

But is it the right move? 

While it’s true that sometimes debt consolidation is the answer, it’s not always the case. There are instances when debt consolidation can further hurt your credit status. Hence, before you decide to consolidate your debt, here are a few things you need to consider before cementing that final decision. 

What Is Debt Consolidation? 

The word consolidation means the bank or lender will calculate the total amount of your outstanding debts and put them all into a single, new account, with a new interest rate. In this way, it will be easy for you to manage and track your debt.

In some cases, when you consolidate your debt, there are chances of having a new interest rate, and it’s less expensive. If you consolidate your debt correctly, it works out cheaper in the long term. In other words, it’s a wise debt refinancing. 

But why do people decide to get a debt consolidation? 

It’s easy. Debt consolidation simplifies your finances. If you’re struggling to pay off smaller loans, you have more room to work out your finances when you consolidate them. However, there’s a catch with debt consolidation, and many borrowers tend to forget this. 

Consolidating debts doesn’t always mean a low-interest rate. It still depends on the financial institution, your payment history, and your credit score. If you are confident that you are positive on these three, you may have higher chances of being granted a low-interest rate when you consolidate your debt. 

Things To Consider 

As mentioned earlier, debt consolidation is a good tool to manage your finances. Still, it’s not all the time that consolidating your debt is the right option and a solution to your financial struggle. Here are a few more things that you should consider. 

Potentially Lower Your Interest Rates 

This is the highlight of debt consolidation, and this is one of the main reasons why many borrowers choose this option. It gives them hope to get back on track in managing their finances. When borrowers consolidate their debt, they have the chance to be granted a lower interest rate. This represents a glimmer of hope for those who are burdened with the weight of extreme debt. 

Understanding the Process 

Borrowers want a low-interest rate when they consolidate their debt, expecting it all the time. However, a low-interest rate is not always a guarantee. And in case you’re granted with one, low-interest rates are usually paired with longer repayments. It merely means you’re still paying more and in an extended timeframe. 

Various Types Of Debt Consolidation 

There are many types of debt consolidation, but the most popular is the credit card balance transfer. Many borrowers file for a credit card balance transfer, especially if there’s a promotional interest rate. 

Suppose you’re an excellent candidate to consolidate your debt. In that case, your high-interest rate card balances can now be transferred into a single credit card with a much lower interest rate than your average rate. This means you can now save money and pay on a single card instead of several. 

When Is Debt Consolidation Not Worth It? 

It’s important to understand that it’s not all the time that borrowers can turn into consolidating their debt. Here are some points of reminder when it’s not worth taking. 

• Reconsider debt consolidation if your debt load is small. If you can pay it off within a year, make debt consolidation your last resort. Opt for paying off a small loan instead to avoid potentially hurting your credit score.

• You can make a debt payoff plan. If you can maximize your finances and plan a working and effective method, debt consolidation should be your last option. 

Takeaway

To reach financial freedom, we need to face the struggles of financial hardship. That’s when we realize how to handle things differently and debt consolidating can teach you so much on that. Though it’s not perceived to be always an option to settle your finances, debt consolidating can help borrowers sort things out, especially when carrying the weight of the burden for a long time. 

Debt consolidation may not always guarantee a low-interest rate, but it can surely grant hope for those facing extreme financial hardship. And like any other debt, it would be wise if you manage it responsibly.