What Is Debt Consolidation-Alternatives For Help With Your Finances
The struggling economy of late is causing people from all over the world to get ever-deeper into debt. Now, if you have done a good job of building up savings and make a decent income, then you can ride out the bad economy without too much trouble. However, if you are like most people, then you live on more of a paycheck-to-paycheck basis. Regardless of which group you are in, the question of what is debt consolidation is a smart one to ask.
Those who are doing alright financially tend to plan further ahead, and make sound financial decisions. These are the people who use debt consolidation as a calculated move to save money. Those who are just scraping by typically see debt consolidation as a way to get out of financial trouble. The truth is that debt consolidation can be both of those things to either group of people.
What Is Debt Consolidation?
To put it simply, debt consolidation is combining several debts into one debt. But why would anybody want one huge payment instead of several smaller ones? That’s a fair question. The answer is that it only makes sense to consolidate if you can save money overall. If, for example, you have several debts with high interest rates, then you would save money by consolidating those debts into a new debt that is at a lower rate of interest. In fact, you could save a lot of money if the terms of the offer are good.
Most people like the idea of saving money, but the truth is that debt consolidation is not for everybody. Even though they can get a lower interest rate on their debts, they actually end up losing more and more money every month. Let’s take a quick look at how that happens.
A person has three credit cards. Card 1 has a balance of $5000, an interest rate of 24% and a minimum payment of $200; Card 2 has a balance of $7500, an interest rate of 18% and a minimum payment of $250; Card 3 has a balance of $2500, an interest rate of 21% and a minimum payment of $150. That totals up to a balance of $15000, an average interest rate of 21% and a minimum payment of $600. Now, if that person gets a consolidation loan for $15,000 at 5% interest, and a minimum payment of $450, they suddenly see an extra $150 a month.
Someone who is disciplined with their money will use that extra $150 wisely, and may even use it to pay down their debt faster. However, someone who is less disciplined will realize that they can swing another minimum payment of $150 and they rack up another $2500 in debt. That’s how debt consolidation can lead to even more financial trouble.
“What is debt consolidation” is an okay question, but an even better question is “am I disciplined enough with my money to take advantage of debt consolidation?” That is a question that only you cn answer, but if you answer yes, then you should get started as soon as possible.