When you are in debt, making the minimum monthly payment each month may be enough to keep harassing calls from creditors at bay, but it won’t help you stay ahead of mounting interest charges on several accounts. Debt consolidation, which is the process of combining debts into one with a lower interest rate, is one way to manage debt. But does it work?
Pros of Debt Consolidation
When you use debt consolidation to lower the rate of interest you pay each month, you can apply more to the principle which can help you pay down the balance of your debt more quickly.
When there is only one monthly payment to track, many consumers find it easier to manage the household budget. As long as you keep up with payments, on time, every time, your credit rating should not be negatively affected by the use of a debt consolidation loan.
Debt consolidation may be a good choice to pay down commercial bank and store credit card balances that you are struggling with because of higher and higher interest charges. If you have a substantial asset to use collateral, like your home, you may be able to get a significantly lower rate of interest than you are currently paying.
Cons of Debt Consolidation
Debt consolidation requires a disciplined approach to money management to be successful. If you consolidate debt but keep the credit card accounts active, you could dig yourself into a deep hole. Avoid the debt trap by cancelling extra cards, or at the very least cut them up until you’re in a better place financially.
If you have a poor credit history, you may need to secure your loan with collateral or use a co-signer. Keep in mind that when there is a co-signer on your loan, if you don’t make regular payments, you could put someone who did you a favour in a financial bind. If you have secured your loan with an asset like your home, you could lose the most important thing you own to pay off your consumer debt. In other words, improper use of a debt consolidation loan can cause more problems than it solves.
Many proven strategies can help you get out of debt and, with careful planning, debt consolidation can be one of them. However, without professional credit counselling to develop better money management skills, you could find yourself in the same position again.
Contact our offices in Kelowna or Kamloops to get the help you need to pay off your debt and formulate a plan for a better financial future.