Should You Consider Debt Consolidation?

If you’re currently paying off multiple types of debt, you know that it can be overwhelming trying to juggle the different payments. After all, there’s a lot to keep track of — how much each payment is, when each one is due, interest rates… the list goes on, and only gets longer per debt. One option to remedy this is a debt consolidation loan. It’s a great option for those looking to simplify their monthly payments, but it’s not the right choice for everyone. 

In this article, we’ll discuss the basics of debt consolidation, its benefits, and how to decide if it’s right for you.

What Is Debt Consolidation?

Debt consolidation is a financial strategy that involves combining multiple existing loans into a single loan. It’s often used to simplify payments to help achieve long-term financial success

One reason that people choose debt consolidation is the advantage of combining different types of loans all in one place. Here are a few types of debt that you might be experiencing:

  • Student debt
  • Credit card balances
  • Car loans
  • Medical bills
  • Personal loans

Benefits of Debt Consolidation

If you’re thinking about debt consolidation, you probably want to know if, and how, it can improve your overall financial picture. When done correctly, debt consolidation offers many benefits. Here are a few of them:

Simplified payments

Instead of having to juggle multiple monthly payments, debt consolidation allows you to have just one monthly payment to account for in your budget. If you’re someone who gets stressed out seeing multiple due payments every month, a singular debt consolidation loan may be able to help you manage feelings of being overwhelmed.

Lower interest rates

When you apply for a debt consolidation loan, you may be approved for a loan that has a lower interest rate than your original loans. With more of your money going towards the principal loan balance rather than interest, you’ll pay off your debt faster. Keep in mind, the more types of debts you’re looking at, the more diverse your interest rates, so a one-to-one comparison can be challenging to calculate.

Improved credit score 

By paying off multiple accounts at once, a debt consolidation loan can help you raise your credit score. Making consistent monthly payments on your consolidation loan can also improve your score.

How Do I Know If Debt Consolidation Is Right For Me?

Debt consolidation can be a positive choice for many people, but it’s not a magic solution for erasing debt. It’s important to consider all of the positive and negative impacts that it can have. Here are a few things to consider:

Fiscal responsibility

It’s important to be honest about your spending habits and history. Debt consolidation is only helpful if you fully commit to changing your old habits and avoiding new debt. Without addressing the root of your debt, you risk accumulating new debt on top of what you already owe.

Additional costs

Sometimes debt consolidation loans require additional costs, such as balance transfer or annual fees. While these may not be large enough to shy you away from a consolidation loan, they’re still an important factor to consider.

Interest rates

Some debt consolidation loans offer lower interest rates than your original debt, but not all of them do. Your interest rate depends on factors including your credit score and income. If you choose a variable interest rate, it can also change depending on the national economic environment.

Long-term goals

It’s important to zoom out and take a look at your overall financial picture when considering a debt consolidation loan. Here are a few questions to ask yourself:

  • Why am I considering a debt consolidation loan?
  • Will this help me achieve long-term success, or is this just a temporary fix? 
  • Do I have any other planned purchases coming up that will add to my debt? 
  • Am I able to commit to changing prior purchasing habits and paying off my debt?

Credit score considerations

If you have a good credit score (often considered 700 or above) and a positive payment history, you may qualify for a lower total interest rate with a debt consolidation loan. This can help boost your credit score in the future, as long as you continue making at least the minimum monthly payments. 

However, if you have a history of struggling to make minimum monthly payments or you’re someone who tends to incur new debt often, a debt consolidation loan may end up hurting your credit score more than helping.

Bank of the James Can Help You Decide If Debt Consolidation Is Right For You. 

At Bank of the James, we’re here for all your questions, no matter how big or small. Our team of knowledgeable representatives understands that the path to financial freedom isn’t always straightforward. We recognize that debt consolidation can feel like a big leap, and that’s why we’re committed to helping our customers achieve financial literacy. 

If you’d like more information on debt consolidation options or have any questions, give us a call or come by a branch. We’re happy to help!

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