When to Consider Debt Consolidation

When to Consider Debt Consolidation
When to Consider Debt Consolidation

Debt is an unfortunate fact of life for many people. Most of us manage it well, only accessing or using credit we have to, but sometimes life creates situations where our finances get out of control. If that’s an experience you’ve had recently, you may be considering whether debt consolidation is right for you.

Debt consolidation refers to a service or program that loans you the money to totally pay off your debts. Rather than addressing your debts individually, you address them in a single monthly payment to the consolidation service. This approach can work for many people because it eliminates the complexity and confusion associated with debt management, but it isn’t right for everyone. Here’s how you can break down your situation and decide if it’s right for you.

How Much Money Do You Make?

Determining your hourly worth and/or yearly salary is the first step. Debt consolidation comes with fees and interest rates (just as with any other loan). If you don’t have an income now, or if you can’t afford the interest rates and fees, debt consolidation isn’t the right choice. You may need to seek bankruptcy or even wait until you have an income again to move forward.

If you’re not sure whether you can afford consolidation, use this formula. Take your hourly worth and multiply it by all of the hours you’d spend managing your finances. Include making calls to creditors, making a budget, and handling incoming calls. If the amount is fairly high, it may actually be more cost-friendly to use a debt consolidation service.

How Quickly Do You Want to Pay Debts Off?

A debt payoff timeline is a tricky thing. You can calculate how much you can afford per month and then times that by the number of months you want to take to pay it off. This will give you a number, but that number only remains true if you make every single payment each time. It doesn’t leave much room for sudden expenses like medical bills or loss of work. Many consumers also over-evaluate how quickly they can pay bills, becoming overwhelmed and further in debt than when they started due to bounced check fees and late debt consolidation payments.

It’s wiser to be realistic about your debts and how long it will take you to pay them off. If you owe $1,000, don’t immediately jump to two months at $500. Instead, set your monthly payment at $100 and take 10 months to pay it off. You’ll put less pressure on your budget and be more likely to actually pay it off.

Consider Using Collateral to Increase Results

If you choose the wrong debt consolidation program, your fees or interest rates can quickly become very high. This is especially true if you have extensively poor credit to begin with. Monthly payment fees may also be higher, making the whole process cost-prohibitive. This often seems a bit awkward; after all, why charge someone more money to fix their debts when they’re already struggling? One very simple reason. Remember that the consolidation company is providing a valuable service by allowing you to fix your credit much faster.

One way to reduce fees and interest rates is to use collateral to bring down your rates. If you own a home, you may be able to remortgage it to pay for collateral instead. If you own a car, some consolidation companies will happily accept it as collateral against your loan. Even whole life insurance policies and investments can serve as collateral in most situations. Best of all, the faster you get into debt consolidation the faster your credit improves, potentially giving you a better rate on your mortgage, credit cards, or car loan, too.