Debt consolidation is the process of combining all existing debt from various sources into one combined loan that you pay off at one negotiated interest rate. It is particularly useful for people who have a number of outstanding high-interest debts, such as consumer credit cards. Let's take a look at the multiple ways that consolidating your debt can help improve your financial situation and overall well-being.
How Can Debt Consolidation Help Your Financial Situation?
Can Save Money Overall
In the end, saving money is the general goal of consolidating your debts. An experienced legal professional can help explain how this process works, as well as the various consolidation options that are available to you. By sitting down and evaluating your specific situation, you'll then be able to choose the best option for your needs.
This process can help you save money in a variety of ways. Depending on your situation, a consolidation expert may be able to negotiate a lower total amount than what you currently owe, or at the very least reduce the interest rate of your debt. In either case, this translates to significant savings over the course of your repayment.
May Lower Your Interest Rate
This is one of the most important benefits of consolidating your loans into one overall payment. By transferring all outstanding debt to one single creditor, you can avoid those high-interest loans that seem to have us in perpetual repayment mode without feeling like we're making any real progress.
To use a simplified example, let's say you have $10,000 in credit card debt at 16% annual interest. This means you are paying $1,600 each year in interest alone, without even chipping away at the principal. If you were to consolidate that credit card debt into one packaged loan at 5%, you would effectively reduce your annual credit card interest from $1,600 to $500, an annual savings of $1,100 on that one credit card alone.
Avoid Bankruptcy and Wage Garnishment
If debts go on long enough without repayment, this can lead to legal proceedings such as the need to file bankruptcy or courts ordering your hard-earned wages to be garnished. These proceedings can transform an already delicate financial situation into a complete crisis, and it always seems to happen when you can least afford to do anything about it.
The best way to avoid bankruptcy and wage garnishment is to take control of your debts before they take control of you. Debt consolidation is an effective tool for doing this, as creditors are ensured that you are taking steps to repay your outstanding debt and thus have no need to pursue legal action against you.
Fewer Monthly Bills to Manage
Many people today have a combination of different debts, from home mortgages to student loans, car loans, credit card debt, medical bills, and payments owed for consumer items like furniture and large home appliances. When times get tough, we sometimes find ourselves struggling to decide which creditors to pay now, how much we can afford, and what has to wait until next month.
That stress can easily be erased with one simple payment that covers all of your outstanding debt. It's less for you to worry about, and most importantly, it reduces the possibility of accidentally missing an important payment because you couldn't keep track of all the different bills. Not only that, you won't have to worry about constant phone calls from multiple different creditors wondering when you are going to make your next payment.
Could Help Expedite Debt Payoff
Once you are able to negotiate a debt consolidation loan at a lower interest rate than some of your original outstanding debt, you'll have a lower monthly payment than you had before. With some of these extra savings, you could consider doubling up on payments whenever possible to help pay off your debts sooner than planned.
Early debt payoff will reduce the amount of overall interest you will pay over the course of your consolidation loan, which can translate to saving thousands of dollars. Be sure to check with a legal professional about any potential benefits or drawbacks associated with the early payoff for the consolidation loan package you are considering.
Can Improve Your Credit Score
Improving your credit score carries multiple benefits, one of the biggest being that you'll be able to negotiate lower interest rates and better loan terms on things like home and automobile purchases. While you may initially see a temporary dip in your credit score if you take out a new consolidation loan, you may very likely see a significant increase in as little as a few months.
This is mainly due to what's called your credit utilization rate, which refers to how much money you currently owe divided by your credit limit. For instance, if you owe $2,500 in credit card debt, and your total credit limit is $5,000, your credit utilization rate is 50%. Generally speaking, a lower credit utilization rate will lead to an improved overall credit score, and consolidation loans can certainly help reduce your credit utilization rate.
Makes Financial Planning Easier
With one simple consolidated loan, you'll gain the extra benefit of having one specific date when all your debt will be paid off. This makes financial planning much easier, as you won't have to keep track of multiple different payment schedules. Not only that, you may also have the opportunity to align your debt repayment schedule with the date you get paid each month.
By getting a better handle on your payment schedule, you'll have much more time and energy to spend on the things that matter most in life. In addition, this makes it easier to plan for major life decisions like making investments, buying a home, or saving for your children's college tuition.
Stress Relief and Improved Physical Health
In addition to multiple financial benefits, getting your debt under control goes a long way toward improved emotional and physical health as well. You'll clear away the clutter of multiple unpaid bills on your desk, and avoid having to answer non-stop calls from various creditors at all hours of the day. This reduces stress and leads to improved physical health which in turn means better quality of life.
Reducing stress not only makes us feel better, but is also associated with the avoidance of some major health problems. Conditions such as obesity, heart disease, diabetes, and depression have all been shown to worsen with stress, so it's important to try and reduce it as much as possible.
Different Consolidation Options
No matter what sort of debt you have, there's a good chance that consolidation can help you manage it more effectively. If your debt consists mainly of things like credit cards, department store cards, personal loans, and unpaid medical bills, you may be eligible for consolidation of what's called unsecured or “credit card” debt. There are also consolidation strategies specifically for student loans or installment agreements for payment of unpaid back taxes.
There are numerous financial benefits to consolidating your debts into one manageable payment, not to mention the improvement to your overall health and quality of life. Reach out to Thomas K. McKnight Law Office today to learn more about this valuable tool and how it can help you take control of your finances.