When done right, debt consolidation is one of the easiest ways to save money. The trouble is that there are so many sharks out there waiting to take people’s money, that it can be both difficult and confusing if you aren’t sure what you are doing. So today I am going to run through exactly what debt consolidation is, the traps to watch out for and the massive benefits debt consolidation can have for you when done correctly.
What Is Debt Consolidation?
Debt consolidation is where you have multiple loans or debts and you consolidate them all into a single debt. The idea is that by merging all of your debts into a single loan, you will be able to negotiate a lower interest rate and pay less money each month.
How Can It Benefit You?
The main benefit to someone who has multiple debts is that by having a lower interest rate, you are paying less interest each month and so you can use that extra money to pay off a larger amount of the principal to become debt free faster.
Debt Consolidation Example
Let’s say that you have 3 existing debts.
- A personal loan for $5,000 at 6.5%
- A credit card debt for $4,000 at 8%
- A car loan for $10,000 at 7%
Overall in this scenario you have $19,000 debt at an overall interest rate of 7.07% and you will be paying about $395 a month over 5 years.
Now if you were to consolidate all those debts into a single debt, there is a good chance that you would be able to negotiate a lower interest rate, perhaps something like 4.5% per annum. Then you would only have to pay $354 per month – saving you $41 a month ($492 a year). If you added all the savings to your loan as extra repayments, you would be debt free 6 months earlier than if you did nothing at all.
What are the Dangers of Debt Consolidation?
The biggest dangers when it comes to debt consolidation are getting new loans that have hidden fees or attract you with very low interest rates for the first year or two, but then increase to higher interest rates than you were paying before. This is why you need to read the loan documents carefully and only get a new loan when you are 100% sure you know and are happy with what the terms and conditions are.
Another big risk is that many people consolidate their debts, but do not put the extra money saved back into the loan as extra repayments. This defeats the purpose of the debt consolidation, as you will likely end up paying more in the long run as the time period will also be extended on the new loan. The whole thing only works if you put all that extra money back into the loan as extra repayments – do not make the mistake of spending that money on something else.
Where Can I Get Help?
There are plenty of specialist debt consolidation companies as well as debt relief companies that may be worthwhile contacting. If you are close to bankruptcy it may even be worth contacting a debt settlement company to assist you like National Debt Relief.
Another option that I think is worth exploring (if you need under $30,000) is Peer to Peer loans. There are plenty of people willing to provide others with funds, and it may work out cheaper than a bank or credit union.
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