When it comes to consolidating debt, I believe there will always be two things that will surprise people the most. Most likely the first surprise will be the amount of paperwork and interest calculations, but even more surprising is when you come to terms with the fact that saving money does not always have that ‘wow I am making progress!’ feeling every time you save. In fact, many times it seems boring and slow and not nearly as ‘cool’ as it should. But if you use debt consolidation wisely, eventually it will be of benefit to your future.
So, if you decide to use a debt consolidation loan, it can definitely save you thousands of dollars in interest; however, this will only happen if you select the right debt consolidation loan for your unique needs. Remember, debt consolidation loans are tools, not shortcuts. Therefore, if you want the full benefit of a debt consolidation loan, you must utilise it correctly.
The most dangerous risk associated with using a debt consolidation loan has nothing to do with the numbers. It goes much deeper than just the math. It is a psychological risk. For example, once you consolidate all your debts into one single payment you may feel as if you have made progress. However, you should not let this false sense of success demotivate you from continuing to pay down your debts.
Consolidating your debts does not equate to eliminating them. It is similar to taking a dinner plate full of food and moving the food from one side of the plate to another side of the plate. Moving food is not eating food.
Consolidation offers the biggest benefit when it lowers your interest rate. When your interest rate is lower, fewer dollars paid in interest means your payments will pay down your balance more rapidly. Over the course of time, that difference will compound in your favour, particularly if the debt would otherwise remain on your credit report for many years.
Simplicity is another benefit of consolidation that gets very little attention. Having multiple due dates, several different lenders, and multiple minimum payment amounts can be overwhelming. Having only one loan, one payment, and one place to focus is far less complicated for consistent payments.
There is also a sense of ownership involved with consolidating your debt. When debts are under a different name, or when they are separated across multiple lenders, it creates separation. When you consolidate all your debts into one loan, which you control, you can see where you are with the loan. You are clear as to which entity is responsible for the loan. This mental change will help to motivate you to attack the debt more aggressively.
Usually, consolidation loans are hard to obtain. You’ll need to do some research in order to find lenders, compare offers, prepare information, and wait for your application to be approved. Once you’ve completed all of that work, sometimes you’ll find that the difference in interest rates isn’t significant enough. So if you’re likely to be paying off your balance in a few months, it’s not worth obtaining a consolidation loan.
Understanding time horizons can help you find the benefits of consolidating debt. For example, if you have large balances with a long-term repayment period, consolidation may provide the best return on investment.
It’s essential to note that debt consolidation does not change spending habits, create a disciplined mind-set, or eliminate debt. All it does is provide new arrangement opportunities, and if spending habits or discipline do not improve after the consolidation, then it’s possible to re-spend the money previously allocated to debt payment. Therefore, you must come into the new consolidation agreement with a clear plan about how to pay off the new debt.
Consolidating debt feels like much more of an effort today than borrowing ever did due to how lenders are cautious about loaning money to borrowers who are trying to optimize their situation versus lending to borrowers who are inexperienced. Knowing this fact, you can see how important it is to use debt strategically.
Consolidation of debt is a useful option if it meets the following conditions: a major reduction in interest; a length of time greater than a few months is expected for repayment; fewer debts to track; and you are determined to repay the debt.
A consolidation loan can be a risky option if the borrower believes they have made progress just by consolidating; if there are no other changes made to help repay the debt; or if the interest rate only slightly decreases.
In summary, although it’s helpful, a debt consolidation loan does not eliminate the debt. The loan simply determines the borrower’s direction — up or down — as they work to eliminate the debt.
