When to Consolidate Your Debt

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Debt consolidation can be a good strategy for better organizing your debt, notes Anna Barker, a Personal Finance Expert and the Founder of LogicalDollar. That is, if you owe money to multiple lenders, paying each of these off each month can make this more difficult to manage. This includes the fact that it increases the risk that one payment will be accidentally overlooked.

By consolidating them into one loan, it becomes much easier for you to focus on paying this off as a single amount, explains Barker. In addition, debt consolidation can be a great way to lower the interest rate applicable to your debt. With different loans and different interest rates, you may be paying more overall than you realize. 

This is why consolidating your debt into a single loan which is subject to a lower interest rate overall can save you literally thousands of dollars in the long run, not to mention that it will lead you to being debt-free much earlier than you would have been otherwise.

All things aside, however, how do you know when to consolidate your debt? We’ve consulted financial experts and had them weigh in on the topic:

Zachary A. Bachner, CFP(r), Summit Financial:

Normally, the main goal of consolidating debt is to reduce the monthly payment. However, the main focus should be on lowering the overall interest rate. Lowering the payment may not help much if the interest rate is higher than the current average rate. This just means that the debt would grow at a faster rate even though they do not require as much to be paid per month.

In relation to student debt, consolidating typically means going from multiple government loans to a single private loan. This normally makes sense if the overall interest rate is being lowered. However, we have seen from COVID that there are some unique situations where having government loans is preferred. Those who consolidated student loans with a private lender most likely did not qualify for the student loan deferment.

Mason Miranda, Credit Industry Specialist at Credit Card Insider:

Use a balance transfer card to consolidate credit card debt. These cards usually come with a 0% introductory rate, with a one-time 2-3% transfer fee. Paying off your balance by the end of the introductory period is a great way to save a lot of money in interest.

Gina L. Pogol Personal Finance Specialist at Gustan Cho Associates:

My most important piece of advice is this: 85% of people who attempt debt consolidation fail. So you need to take a very hard and honest look at your spending habits and why you got into excess debt in the first place. If you used your credit cards to get you through a rough patch of unemployment, for instance, and now you’re employed again and ready to move on, you can

probably succeed with consolidating your debt. 

If you are a chronic overspender and don’t address the core issue of why you overspend, debt consolidation will get you into deeper trouble, because you’ll wipe your credit cards clean and then run them up again. You’ll have twice as much debt.

The one thing people who consolidate debt need to remember is that you. still owe. the. money. Your debt is restructured; it doesn’t magically disappear.

Brian Meiggs, Entrepreneur and Founder of Smarts:

Debt consolidation can be a good idea if your debts are high but not through the roof. Ask yourself this, can they be paid off in three to five years? If the answer is yes, you should consider debt consolidation. You’ll lower your interest rates and be free of debt in a couple of years with a solid repayment plan. If your debts are payable in 6 months to a year, you don’t need to consolidate.

Manny Vetti, President of BackTaxesHelp:

You know it’s time to consolidate your debt when your debt is spread across more fingers than you have on your hand. The more accounts with large sums of debt, the bigger the mess you have. Consolidating your debt makes it easier to pay everything at a much lower interest than what you were probably paying in the previous long term. 

For example, say you’re still paying off a credit card after 5 years. That interest is more than likely to still be the same or higher. You can consolidate that debt into a new card with a free year of 0 interest or you can find a loan that’ll offer you lower interest. 

Amber Kong, Content Strategist at CreditDonkey:

Your credit history and credit score will define your capacity to pay for your loan. If you are responsible and smart enough to pay your dues and credits on time, it increases your chances of having a lower-interest in debt consolidation. Once your lender acknowledges your credibility, it is easier to negotiate for the best and flexible terms for your debt consolidation.

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