Credit card debt in the United States has hit a record high and shows no signs of slowing down. According to a 2017 study, the average American household carries almost $17,000 worth of debt on credit cards. That doesn’t even paint the full debt picture many households experience given that this study did not look at debt attributed to bank loans, payday loans, and more.
If you’re stuck watching helplessly as your indebtedness balloons due to compound interest, there are two things you need to realize.
First, you’re not alone. Second, there is help available to you.
Many people facing down large amounts of debt opt for debt consolidation. This entails unifying their debt under one lender with more favorable terms.
If you’re considering taking out a debt consolidation loan, the list below contains information you should consider before going down that path.
1) In Order to Benefit From Consolidation, You Need to Pay Your Bills
Debt consolidation may simplify and lessen your payment burden but it won’t make it go away. If you’re going to struggle to pay down your debt, even at consolidated rates, you won’t improve your situation significantly with consolidation.
Before going through the consolidation process, ask yourself, “What can I do in my personal life to free up more money and pay down my debt reliably?”
Anything from cutting down on eating out to reducing living expenses can be tremendously helpful. Small habit adjustments can put you on the path to paying down your consolidated debt consistently.
2) Your Interest Rate Should Go Down
The point of consolidating your debt is to simplify the number of lenders you’re beholden to and improve the terms of your loans. Among the key terms, you’ll be looking to improve through consolidation is your interest rate.
To achieve that end, make sure you’re consolidating with a lender that’s offering a better rate than the average rate of your current debt pool. Doing this is key to ensuring consolidating your debt improves your financial situation.
3) Your Loan Terms Should Be Better
Beyond interest, many loans (particularly those offered via short-term lenders) may come with a lot of fees. These fees include late payment fees, activation fees, and reactivation fees to name a few. Those sorts of fees coupled with compound interest can make your debt grow substantially over time.
Be sure that the lender you’re consolidating with offers you leeway in the way of fees. Things like late payment forgiveness or a more lenient payment schedule can go a long way over the course of you paying down your debt.
4) Just Because Your Monthly Payment Is Lower Doesn’t Mean You’re Paying Less
When discussing your consolidation with a lender, they may provide you with a projection of what your monthly payments will look like under them versus where you’re at now. The goal should be for those payments to be less expensive than what you’re managing now.
Still, there’s more to a monthly payment than just the initial rate. First off, if your monthly payment is lower but your loan term is extended out for a longer period of time than it was with your previous lenders, you may not be saving money.
Slightly lower payments over a longer period of time mean more payments you need to make and more interest your new lender will get to charge you.
Also, many people offering debt consolidation attract customers with low introductory rates. These rates can be as favorable as 0% interest. These introductory rates tend to not last and once your promotional term is over, you may end up paying more than you are now.
Be sure to check all of the terms you’re getting with your new lender. You should feel confident that you’ll actually end up paying less over the total life of your new loan before transferring your balances.
5) Different Lenders Offer Different Terms and Conditions
There is no one size fits all consolidation plan in the lending market. What that means is that every consolidator you go to will offer you different interest, terms, and conditions.
To make sure you’re getting the best possible deal, be diligent and talk to multiple parties prior to consolidating your debt. A little work up front finding the right lender to transfer your debt to could save you thousands in the long run.
6) Be Wary of Scams
People looking to consolidate their debt are often in a desperate position. Unfortunately, many bad actors look to prey on that vulnerability.
When consolidating your debt online, make sure you’re doing business with a legitimate lender. Make sure their website doesn’t seem fishy, talk to their customer support team, read reviews online, etc.
Also, never do business with lenders who email you from non-business email (ex: firstname.lastname@example.org). These are definite scams you should avoid.
7) Debt Consolidation Isn’t Always the Solution
Consolidating your debt is an excellent way to get a handle on your monthly expenses and pay less over the life of your debt. For people drowning in debt and unable to meet their monthly payment obligations though, consolidation isn’t likely to have a deep impact on their situation.
If you’re completely underwater when it comes to your debt and aren’t sure consolidation is right for you, consider talking to a debt relief counselor that’s accredited through the American Fair Credit Counsel for more options.
Wrapping Up Things You Need to Know About Debt Consolidation
If you’re like millions of Americans balancing massive amounts of credit card debt and other debt types, debt consolidation can be helpful.
It allows for easy management of your debt portfolio through a single lender. It also allows you to get better terms and conditions across your debt so you end up paying less in the long run.
Remember, consolidating your debt is not a magic bullet fix for your financial problems. Take into deep consideration the tips listed above. Be sure you’re informed before pursuing a reputable lender and consolidating your debt.
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