The beauty of debt consolidation lies in the fact it can be easier to attack certain problems all at once, rather than in a piecemeal fashion. Rolling as many qualifying debts as possible into a single obligation allows you to apply economies of scale to repay debts sooner and for less out of pocket. Still though, there are times when it’s appropriate to ask, is getting a debt consolidation loan worth it?
The reality is that debt consolidation, like every other strategy is best employed under the proper circumstances. Otherwise, it can create more problems than it solves. Here are some questions to ponder before making the decision.
DO I HAVE A GOOD CREDIT SCORE?
The biggest advantage of debt consolidation is the ability it affords you to lower the interest rates you’re paying on outstanding liabilities. For example, the average interest rate on credit card debt these days is 20.8%, according to the personal finance advice site The Balance.
Meanwhile, the interest rate on a personal consolidation loan can be as low as 3% or as high as 36% — depending upon your credit score. A 680 or better can get you the best available rates, assuming your income and other obligations line up.
Another popular option, a balance transfer credit card, also bases your ability to qualify upon your credit history. These cards often come with an ultra-low or even a 0% introductory interest rate — for borrowers with strong credit histories.
CAN I AFFORD THE MONTHLY PAYMENTS?
Another factor determining the efficacy of a debt consolidation loan is the amount of money you’re bringing in each month. While it should go without saying, it does bear repeating that you should be making enough money to enable you to comfortably make the loan payments each month.
Before applying for a debt consolidation loan, it’s a good idea to create a spending plan to make sure you can apportion enough cash to repay the loan, while still meeting all of your other responsibilities and enjoying living your life. This means you’ll need to get an idea of what the monthly payment will be on that consolidation loan to be certain it will fit into your budget before taking it.
HAVE I FIXED THE UNDERLYING ISSUE(S)?
Life happens, sometimes it’s good — sometimes it’s bad. Accidents, sudden medical emergencies, and huge unexpected repair bills can drive us into debt if we don’t have an emergency fund set aside upon which to fall back. Moreover, a cascading series of such events can push us to the brink of insolvency, due really to no failing of our own.
However, whipping out the plastic every time a new pair of red-soled shoes catches your eye, or a superhigh-definition 77-inch TV calls your name,can also push you beyond your ability to meet your obligations comfortably. It’s important to be certain that those impulsive spending habits are under control before taking a consolidation loan.
Otherwise,you’ll justmake a bad situation worse.
With the above points in mind, perhaps a better question here would be whenis getting a debt consolidation loan worth it? The answer is when you can get a lower interest rate, afford to repay the loan comfortably and avoid spending recklessly until the debt consolidation loan is paid off.
Consolidation is likely the answer you’ve been seeking if you can answer yes to all of those questions. On the other hand, it might not be the best move for you at this time if your answer is no to one or more of those questions.
