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Is Debt Consolidation Worth It?: Looking For Help

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

Debt is a significant problem for many individuals. In America, the average household credit card debt is over $8,000. It is safe to say that many people need help paying off their debt. You may be considering debt consolidation. However, you may be thinking if debt consolidation is worth it.

Debt consolidation could be a financial move that is worth it if you are suddenly in a bad financial position. However, it can only be helpful if used at a particular time.

I will explain what debt consolidation is and if it is worth trying for you.

What Is Debt Consolidation?

Debt consolidation is the act of combining a collection of your debts into a single debt. This is useful if the new loan will require smaller monthly payments over the same term compared to your current loans. It is like refinancing for every other financial aspect of your life.

This is usually done with an outside lender. Some of the companies that do this include:

  • Goldman Sachs
  • SoFi
  • Payoff.

You can also find these at many banks and credit unions.

When Is Debt Consolidation Worth It?

Debt consolidation is useful if you have many debts that each have a high APR. Credit card debts are usually a good example of this. However, debt consolidation loans still have moderate to high APRs ranging from 6% to over 30%. Debt consolidation is only really useful for some of the highest APR loans including credit card and payday loans. Keep in mind, the average APR for a secured credit card is 17.89% so some consolidation loans may not be worth trying for some credit card debts.

Most loans have smaller APRs including:

  • student loans
  • auto loans
  • business loans
  • mortgages.

Consolidation loans just may not be worthwhile for most types of loans.

Debt consolidation is only really worth it if credit card balances or payday loans you know you will not be able to pay the balance off before the interest sets in. Mistakes happen financially and sometimes you will not be able to pay off the balance before high-interest sets in. If the balance is high enough you could try a consolidation loan to save money. However, this will only work if you have good credit, low credit scores could result in higher APRs than your current APR.

You Should Avoid Consolidation Loans

You should avoid taking consolidation loans because there are usually fees involved. Every time you take one out that will be added to the APR. Furthermore, this will open up a new line of credit which will require a hard inquiry. A hard inquiry could affect your credit score depending on how you start the loan and how you repay it. It is most likely that a new consolidation loan will have a negative effect on your credit score, at least at first.

Consolidation loans are essentially for borrowers who realize their old loan may cost them money. In other words, they signed up for a debt with a high APR or are facing penalties based on their payment behaviors. None of these qualities are found in loans for low-risk borrowers.

Consolidation loans are not a good option, but they could be a better option in some scenarios.

Steps To Take Out A Consolidation Loan

  1. Check your credit score – your credit score should illustrate how much you should expect in APR and fees. It may also help you determine if this is the best way to go. If your score is less than ideal you should expect the consolidation loan to have a higher APR. If you have a debt you should make sure to at least pay the minimum payment before you try to take out a consolidation loan.
  2. Check your debts – consolidation loans are only really useful if you have too much to pay in a single or multiple loans. It is possible that the debt you have is most manageable in its current place.
  3. Compare loans – if you are considering a consolidation loan, you should go shopping for some lenders. See who will offer you the lowest APR or the lowest monthly payment. At this point, you should determine if a consolidation loan is an appropriate step for your debt.
  4. Apply for the loan – if you have good credit, you should have a high chance of approval. However, the process will take time and there is no guarantee, especially if the economy is not looking great. After that, you just need to close the loan.

Final Thoughts

Sometimes money is hard to manage, and sometimes you have a debt where you will face high penalties or high interest. When this happens a consolidation loan may be a good option to have, but only if the APR is smaller than your current debts or if it helps you avoid high penalty fees. In many situations, a home equity loan may provide you with a low APR.

Consolidation loans may be a way for you to save money, but only if you do your due diligence. Do your research before you try to take this on. This article is a good starting point to determine if you should try a consolidation loan, make sure to read up more.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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