How Does Debt Consolidation Work And Who Should Try It?
Consumer debt in America has long been a major problem, and COVID-19 has only made it worse. Before the pandemic, the average American had over $90,000 in debt, and we will have to wait and see what the reality is at the end of 2020. So, if you are struggling with debt, you are certainly not alone.
Unfortunately, just because debt is ubiquitous in the US does not mean much is being done to solve the problem. On the contrary, it has been left up to the consumer to manage their own debt, even as the crisis only deepens. COVID-19 stimulus payments will at best keep people afloat rather than alleviating debt at all.
The good news is that there are private products that can help you manage your debt. One of the most popular options is debt consolidation. Are debt consolidation loans worth it? Let’s take a look at how it works and who it is for.
Americans are in so much debt because they receive credit from many different sources. Many people have multiple credit cards, student loans, healthcare debt, and more. These each carry different interest rates and terms. On the whole, they are costly and confusing.
A debt consolidation loan refers to when a loan company buys all of your debt and lets you pay it all off at the same interest rate. Instead of paying multiple companies, you pay one value each month to one company.
It provides a better way to manage your debt and, in some cases, an interest rate below the median rate you paid before.
Debt consolidation loans can benefit most people who have debt from multiple sources, but it is probably most attractive to people with multiple credit cards to pay off. There are a couple of reasons for this. Credit card debt can stay with you indefinitely, because there is no schedule on which you pay it off.
Perhaps more significantly, credit card interest rates are much higher than most loans, due to their high risk nature. A debt consolidation loan can give you a significantly lower interest rate. While you can no longer put off credit card payments, your debt stops snowballing out of control.
If you are trying to pay off other kinds of debt, debt consolidation can still be useful. However, make sure to do all the calculations to ensure you are getting a better rate than you already pay. Furthermore, take any transfer fees or added costs you might pay for the debt consolidation into account when doing these calculations.
Debt consolidation is not always a good idea, even if you can get a slightly lower interest rate. If you have all your debt under control, it may be worthwhile to keep paying it off as is, because it can grow your credit score.
Good credit score will help you get better rates in future, as well as more possibilities when buying assets or applying for business loans.
Debt consolidation can really make a huge difference to your finances, but should only be considered when you are struggling to manage your current debt.