f you are struggling with a large amount of debt, loan consolidation can provide the solution you need. Besides simplifying all your debts into one monthly payment, it can also help you save money by making you pay only one interest rate, as opposed to several. However, like everything in life: loan consolidation has its pros and cons.
Table of Contents
The Benefits of Loan Consolidation
The goal of loan consolidation is usually to get more favorable loan terms. More precisely:
- Lower or Fixed Interest Rates
You may be able to lock in a loan at a lower interest rate than your old loans offered, which will often reduce the interest charges over the life of the loan. At the very least, get a fixed interest rate that will make your interest payments more predictable.
- Extended Loan Term
You could gain additional time to repay the loan.
- Lower Monthly Payments
Both of the above two factors can result in a lower monthly payment compared to the combined sum of your existing monthly payments.
- Loss of Collateral
A bigger loan implies a more significant asset you risk losing if you default on the loan.
You may have to pay loan application fees along with fees for paying off your existing loans too early. These costs can eat into your savings of consolidating the loan- perhaps even exceed them.
Ensure You Fix the Real Problem First
What most people don’t think of is that loan consolidation will not solve the behavior that put you in debt in the first place. Suppose you continue spending more than you earn after taking out a debt consolidation loan. In that case, you could increase your credit card debt, which would destroy your credit score and make it more difficult to repay your debt consolidation loan and possibly even wipe out its benefits.
Regardless of whether you decide to consolidate your loans or not, it’s essential to address the core issue. There are some necessary steps which you can take to get a better idea of how to approach the problem as it will not be solved with the same habits that got you there.
- Set up a budget
Debt is usually the result of overspending. Regardless of how much you earn, you will never be debt-free or wealthy if you do not know how to save money. Even millionaires can quickly go bankrupt if they have terrible spending habits. The first step to solving your debt problem and gaining financial independence, in general, is to establish a budget. The general rule is to spend 50% of your income on needs, 30% on wants and 20% on savings. Your debt repayments count as needs as you have obliged yourself to make those payments.
- List and Categorize Your Expenses
The goal is to scrutinize those categories to identify where you can trim costs so be precise and ensure it is all there. The more effort you put in it, the more valuable this data will be.
- Identify Potential Savings Opportunities
Your electricity bill will make the most significant part of your monthly utilities. In addition to making your household and lifestyle more energy-friendly, maybe you can also find a better electricity and gas deal. Comparing prices is vital, so look for the best CT energy supplier by looking at different rates so you can trim several hundreds of dollars off your electricity bill.
Stick to the plan
For the loan consolidation to truly help you get out of debt, you have to stick to your budget and change your existing habits. Do you need to get coffee from Starbucks every day? Can you cook more, so you eat out less often? The list of possible improvements is pretty much endless.
Reward yourself when you achieve milestones
You will not pay down your debt any faster if you view it as a form of punishment, so make sure you reward yourself from time to time to maintain your motivation.
While loan consolidation can be a smart move, it can only be beneficial long-term if you choose the right type of loan, one that has favorable terms and most importantly, if you change your habits so that you do not wipe out the savings. Consolidate your loans only if it is the most financially sound option for you, not just because it will be easier to have only one payment per month. Make sure you consider what you could gain and what could you lose as a result of loan consolidation.