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Everything You Need To Know About Consolidating Debts

by Olufisayo
Debt consolidation

Learn the Basics of Consolidating Debt

June’s almost here, meaning it’s time for long afternoons by the pool with salt-rimmed margaritas, followed by hazy evenings filled with beach bonfires. But your hot girl summer could quickly become a multiple debt bummer if your stack of unpaid balances gets out of control.

One possible solution? Balance transfers and debt consolidation loans. This article will cover everything you need to know about consolidating debts—so you can treat yourself this summer, instead of sinking all your extra cash into interest payments.

What is debt consolidation?

Debt consolidation is when you roll multiple debts into one monthly payment. Debt consolidation can help you save money on interest (assuming you secure a lower interest rate) and help you pay your debts off faster.

How to consolidate debt

There are two main ways to consolidate debt: a balance transfer credit card or a debt consolidation loan.

  • Balance transfer: With a balance transfer, you move multiple credit card debts to a new, lower-interest card. You’ll have all of your debts on one card, which can both save you on interest and make bill paying easier. The better your credit score, the more likely it is you’ll be able to secure a good interest rate. Many balance transfer cards even come with a 0% APR introductory offer.
  • Debt consolidation loan: You can also take out a fixed-rate debt consolidation loan to pay off your existing debt, and then pay the loan back in regular installments. Again, borrowers with high credit scores will likely qualify for the best interest rates.

Other ways to consolidate debt include 401(k) loans and home equity loans. However, these are riskier since you’re involving your retirement or home. If you default on your loan, you’ll be putting yourself in a very vulnerable position.

       

Costs of debt consolidation

You may have to pay some fees depending on the method you choose, including origination fees for personal loans, balance transfer fees for credit cards, and closing costs for mortgage-related loans.

When debt consolidation makes sense

You may want to consider consolidating your debt if:

  • You have a credit score that’s high enough to qualify for a 0% APR credit card or a debt consolidation loan with a low-interest rate.
  • Your total debt (minus your mortgage) isn’t more than 40% of your gross income.
  • You have a consistent flow of cash to help pay off your debt.

When debt consolidation doesn’t make sense

Debt consolidation might not be a good choice for you if:

  • You don’t fix the spending habits that got you into debt in the first place. After all, it isn’t eliminating debt as much as restructuring it.
  • Your debt is either so large you don’t think you’ll be able to pay it off, even with reduced payments, or so small that you’ll only save a tiny bit of money.

There you go: debt consolidation 101. Hopefully, this article has helped you decide if debt consolidation is the right choice for you. Remember to focus on improving the spending habits that caused you to deal with debt in the first place. We know you’ll be able to pay off your balances to have your best summer yet.

Photo by Mikhail Nilov from Pexels

       

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