Is Debt Consolidation Right for Me?

Using a debt consolidation loan to refinance your existing debt can make your debt more manageable. You’ll have one monthly payment at one interest rate instead of many smaller bills due on different days of the month.

Here are some questions you should ask yourself to decide if a debt consolidation loan might work for you.

1.) Have I fixed the debt problem?

Take some time to think about why you’re in debt. If a medical bill, job loss or some other temporary hardship describes your situation, the fact that you have a job or have paid the medical bill means you’ve solved the problem that caused the debt in the first place.

If, on the other hand, you accumulated debt by overspending on credit cards, a debt consolidation loan may not be the answer just yet. First, make a budget you can stick to, learn how to save and gain responsibility in your use of credit. Getting a debt consolidation loan without doing those things first is a temporary solution that can make matters worse.

2.) Can I commit to a repayment plan?

If you’re struggling to make minimum monthly payments on bills, a debt consolidation loan can only do so much. It’s possible that the lower interest rate will make repayment easier, but bundling all of that debt together could result in a higher monthly payment over a shorter period of time. Before you speak to a loan officer, figure out how much you can afford to put toward getting out of debt. Your loan officer can work backward from there to figure out terms, an interest rate and total amount borrowed.

If you’re relying on a fluctuating stream of income to repay debt, it may be difficult to commit to a strict repayment plan that’s as aggressive as you like. You can still make extra principal payments on a personal loan, so your strategy of making intermittent payments will still help. You just can’t figure them into your monthly payment calculation.

3.) Is my interest rate the problem?

For some people, the biggest chunk of their debt is a student loan. These loans receive fairly generous terms, since a college degree should generally result in a higher-paying job. Debt consolidation for student loans, especially subsidized PLUS loans, may not make a great deal of sense. You’re better off negotiating the repayment structure with your lender if the monthly payments are unrealistic.

On the other hand, if you’re dealing with credit card debt, interest rate is definitely part of the problem. Credit card debt interest regularly runs in the 20% range, more than twice the average rate of debt consolidation loans. Refinancing this debt with a personal loan can save you plenty over making minimum credit card payments.

4.) Will a debt consolidation loan cover all my debts?

The average American household has nearly $15,000 in credit card debt and if you have more than $50,000 in credit card debt, it will be difficult to put together a consolidation loan that can finance the entire amount. It’s worth prioritizing the highest interest cards and consolidating those instead of trying to divide your refinancing evenly between accounts.

Debt consolidation doesn’t work for everyone, but it can do wonders for many people. The ability to eliminate high-interest debt and simplify monthly expenses into one payment for debt servicing can change a family’s entire financial situation. If you think you might be interested in consolidating your debit, gather your account statements and your paycheck stubs, and visit the Frenchtown Financial Opportunity Center for more help.

*The content provided in this article consists of the opinions and ideas of the Frenchtown Financial Opportunity Center, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. The Frenchtown Financial Opportunity Center disclaims any damages or liability for decisions you make based on the information provided.

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