Yes, Debt Consolidation Can Save You Money. Here’s how…
But I’m in debt
It can sound pretty incredulous to hear that you can save money when you’re already in trouble financially, and you are directing all your resources towards digging yourself out of that deep hole of debt. I admit, I also didn’t think it was possible. But there is a way you can save money while paying off your debts.
Have you heard about debt consolidation?
Well, even if you haven’t, the term is rather self-defining: you are simply consolidating all your multiple debts into one large debt. This may be done through what is commonly referred to as credit card balance transfers. You move all your balances to one low rate credit card and pay off that one card.
The other debt consolidation method is using a debt consolidating loan. You get a loan from a lender to pay off as many of the multiple debts as you can then focus on paying off that loan. This is also offered at a lower interest rate.
So how does this save you money?
There are two benefits to consolidation loans that are the key to saving money, if you follow through with them:
- Lower rates
Debt consolidation loans generally offer lower interest rates than what you were paying before. This will immediately save you quite a bit of money in the long run. The challenge here is to ensure that the rates are actually lower.
If you have various kinds of debts, from credit cards to unpaid utility bills, you will be seen as risky by the lending institution. This could result in higher interest rates for you. Further, if you are using non-traditional lenders, you will probably end up paying certain extra fees that could end up with you using more money than saving it.
The lesson here is to read everything on that contract before signing up. If you can’t understand it, get someone who does to explain it to you, like a credit counselor or a trusted friend with experience in debt consolidation.
- Paying it all off
The loan is intended to clear some part of your overall debt. Even if it doesn’t cover everything, it can help clear some of the more expensive debts with higher rates; so rather than paying interest on all the loans concentrate on clearing off the larger loans. That way, you will be eliminating debt and freeing up your money from paying some interest amounts.
Since you can negotiate the length of your loan repayment, some people think that it is best to lower the monthly payments and extend the repayment period. This may work as a temporary relief but will run up extra costs in the long run. So, if you stick to a plan that has the shortest repayment period possible, you will definitely save some money.
Note to self
The plan here is to eliminate as much of the debt as possible. So please, don’t go getting new credit cards and start racking up more bills on the side. It makes the entire debt consolidation process nothing more than a fool’s errand.
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