Consolidating Debt: When Does It Make Sense?

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  • Consolidating Debt: When Does It Make Sense?

    If consolidating multiple debt payments into a single one can help you do that religiously, it might beworth considering.

    Say you've been carrying a handful of credit cards with rates near 20%. But doing so will only digyou deeper into the hole. Streamlining debts can be a useful way of managing an unyieldingfinancial burden and lowering costs, but it's not for everyone. Making payments on time is key tohaving a good credit rating. Canceling out your credit card debt with a 7% loan will drasticallyreduce what you pay in interest over the life of the loan.

    The case for consolidating: lower interest

    Looking to get started? Use a debt payoff calculator or talk to a certified credit counselor to figureout the right approach for you.

    The fact that a loan has a set term also acts as a brake on the amount of interest you pay.

    The lure of fixed rates, simplified payments

    There are two major reasons to consider consolidation: to save money by getting a more favorableinterest rate and to facilitate making payments on time.. Leave the cards open to help your creditscore, but resist the urge to use them.

    If you have a variable rate loan, another reason to consolidate might fast debt consolidation loansbad credit be to nail down a fixed interest rate. That way, you won't run the risk of being hit with arate increase.

    Debt can be hard to crawl out of, especially when payments on credit cards, consumer loans andstudent loans continue to pile up on top of your living expenses. Key factors include how quickly youwant to pay off those loans and how much of your school debt is from federal loans, which havecertain consumer protections that would be lost if they're rolled into a consolidated loan. There'salso the fact that you can only consolidate student debtonce, so you want to make sure you're choosing the most advantageous moment before doing it.

    Finally, if juggling a slew of credit card bills has caused you to forget a payment or two,consolidating might help. With a loan, by contrast, the debt must be paid off by the end of the loanterm.

    How about student loans?

  • Consolidating should be a part of a largerstrategy to decrease debt.

    If your debt can be paid off within sixmonths to a year, the amount of money youwould save by consolidating might not beworth the time and effort involved.

    When to avoid consolidation

    With credit card balances, a consumer canscrape along paying just the minimum, which often covers only interest and hardly tackles theprincipal. It can be tempting to go on using your newly paid-down cards after consolidating. Hereare a few things to consider before jumping into it.

    If your debt includes student loans, the question of whether to consolidate becomes morecomplicated. If you do that over the course of years, what you pay in interest on a purchase can endup being significantly more than the initial principal. With a fixed rate, you know what your interestcosts will be, regardless of the movement of the market interest rate that determines whethervariable rates rise or fall. If you've been making payments on time for a couple of years and havedecent credit, you might qualify for a loan at 7%. Overwhelmed with a blizzard of monthly bills,many people look at consolidation as an alternative