For many of us, debt is a fact of life. Through it, we’re able to finance major purchases, like houses, cars, and televisions, without spending years saving for them.
Occasionally, however, debts can become complex and unhealthy. When you are paying off many different credit cards each month, it’s easy to feel that life is spiralling beyond your control.
In many cases, the solution to this is to consolidate. But what does that mean, exactly? And how can we make it happen? Let’s take a closer look.
What is debt consolidation, and when might it help
Consolidation is the practice of taking out a single large loan in order to pay off several smaller ones. This means that you’ll just have a single payment to make to a single source. It usually also means that your effective rate of interest is lower, especially if you’re currently struggling to deal with credit card debt.
This method is distinct from other debt management strategies in that it reduces the mental load imposed by a complex set of financial arrangements. When you’re just paying one creditor, it’s easier to feel that you’re on top of the situation.
The different consolidation options
There are actually several different approaches to consolidation. You’ll want to pick the one that’s appropriate for your needs.
The most obvious is a dedicated debt consolidation loan, which is designed for precisely the purpose we’ve just outlined. These tend to come in two different types. Secured loans involve nominating an item for use as collateral, whereas unsecured ones do not, which can mean they are often a bit more expensive.
Then there are balance-transfer credit cards, which will allow you to move the balance from one (or several) cards to another, and thereby take advantage of introductory offers in order to pay down the balance more quickly.
Finally, you might seek the advice of a dedicated charity or specialist adviser. While you might hesitate before spending money on this sort of thing, you should be aware that the right guidance will often pay for itself.
Key things to check and questions to ask before consolidating
Before you settle on a new loan, you’ll want to check whether the monthly payments are affordable, and that you have a plan to cope with the debt in the long term. The process might be complicated by early termination fees on your existing debts – so make sure that these have been factored in. Finally, if you’re constantly taking on new debt, you might find that your credit score is negatively impacted – but bear in mind that, if you get it right, you’ll end up better off in the long term.
Managing your debt after consolidation and avoiding new debt traps
After you’ve consolidated, you might feel that you’ve found a little extra breathing room. But it’s important to be aware that the underlying habits that lead to your debt situation might still be there. Make sure that you have a plan for making your payments, and that you take a conservative approach to spending. Remove sources of temptation from your day-to-day life!
