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  • Action Plans & Tips

    Action Plans & Tips

    Credit and debt: When should you consolidate your debts?

  • Action Plans & Tips

    Action Plans & Tips

    Credit and debt: When should you consolidate your debts?

Debt Consolidation Timing: Know When to Streamline Your Debts

Debt consolidation involves taking out a new loan to pay off several other debts. This is common if you have home equity, debt consolidation is then done to attain a lower interest rate and create greater ease in repayment of a single loan. However, avoid the temptation to use your property as an ATM. This should be used only for major expenses like a car, home improvements, or education costs. If you have huge credit cards and microloan debt, this can often be advantageous because these generally carry a high-interest rate.

Consolidating your debts can be a strategic move for managing and repaying what you owe more effectively. However, it's not always the best option for everyone. Here's when it might make sense to consider debt consolidation:

  1. High-Interest Rates on Current Debts: If you have several high-interest debts like credit card balances, consolidating into a loan with a lower interest rate could save you money on interest payments.

  2. Difficulty Managing Multiple Payments: When keeping track of numerous payment due dates and amounts is challenging, consolidating them into a single monthly payment can help simplify your finances.

  3. A Good Credit Score: To qualify for a consolidation loan with a favorable interest rate, you typically need a good credit score. If your credit score has improved since you took out your existing loans, consolidation could be beneficial.

  4. Stable Income Source: Having a reliable and stable income ensures that you can keep up with the new consolidated loan payment, which is essential for the consolidation strategy to be successful.

  5. Financial Discipline: Consolidation requires discipline. If you are consolidating credit cards, for instance, it's crucial to control your spending to avoid running up new balances, which could worsen your financial situation.

  6. You Have a Plan to Pay Off Debt: Debt consolidation should be part of a broader financial strategy to get out of debt. It’s important to have a plan to not only make payments on the new loan but also to save and avoid future debt.

  7. Interest Rates are Favorable: The consolidation loan should have an interest rate that is lower than the weighted average of your current debts. Otherwise, consolidation might not be cost-effective.

  8. Savings Over Time: Calculate the total cost of your debts as they stand, including interest rates and payment periods. Compare this to the potential new loan terms to ensure consolidating would result in significant savings over time.

  9. The Psychological Benefit: Sometimes, having a single debt as opposed to many can provide a psychological advantage, making the task of paying off debt seem more manageable.

Debt consolidation can be a great tool, but it’s essential to carefully consider if it’s the right step for your personal financial situation. It’s also wise to consult with a financial advisor before deciding to consolidate. 

If you are struggling to get a debt consolidation loan you can give us a call to see if you qualify for debt review.

 

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