Debt Consolidation

 

Much like my “Coffee-a-Day” article, no personal finance site would be complete without an article done on debt consolidation.  The truth is that this relatively simple set of principles can save you a lot of money, especially when you are young and taking on a lot of debt to initially start up your life.  Obviously the hope is that you never have any debt at all to worry about, but sadly this is not the case for the vast majority of people; therefore, it is useful to learn how this corporate-sounding term of, “debt consolidation” can actually be quite useful to people.

The basic idea behind debt consolidation is to take all the debt that your paying high rates of interest on, and try to “move it” to a central debt loan or account with an advantageous interest rate.  By combining many debts into one single account or loan, you are likely going to save yourself a lot of time and money.  That is all is debt consolidation really is, taking all of your smaller debts (usually consumer credit like payment plans, or credit cards) and combining it all under one larger loan.  A good example of this is using a service like moneysupermarket.

Make It Easy On Yourself With Debt Consolidation

Debt Consolidation

We will get into the financial reasons for doing this in a minute, but the first nice outcome from combining your debts is that you will no longer have to deal with multiple creditors every month.  For example, many people have to deal with 3 credit cards, a line of interest, a personal loan, and maybe an instalment payment plan for a specific item.  When you consolidate your debt you can take out a central loan and pay off all of these little ones so you just have one account and one number to worry about paying down every month.  This is a nice load off of people’s minds, and will likely result in a lot less late payments (consequently helping you pay off your debt faster, as opposed to sinking you further in).

With Debt Consolidation You Can Pay Off Your Debt At Low Interest Rates

The financial benefits are even more drastic.  The most obvious cases where debt consolidation can help the most are for high-interest credit cards.  Some credit cards out there are charging 29.9% interest on unpaid accounts!  If your investments got that rate of return your principle would double every 27 months!  Instead of paying the ungodly rates that of interest that credit cards charge, it is much smarter (and cheaper) to go down to your bank and see what options there are for consolidating your credit.  If you have a house that you have paid off (or at least a large portion of it) the bank will likely allow you to take out a Home Equity Line Of Credit (HELOC).  A HELOC is a loan that is backed by your house.  This means that it is less risky for the bank because if you don’t pay off the loan they can seize your house (did I mention you should really, really not default on a HELOC?).  Because the credit is less of a risk you can get a very good interest rate (usually right around prime).  You should feel free to compare at multiple institutions since even a small difference in the percentages can mean thousands of dollars to you over a period of years.  If you compare a 3% HELOC to a 29.9% credit card loan, the huge difference is plainly a major advantage to your overall financial situation.

If you do not own your own home there is still a lot of money to be saved through consolidating your debt.  The bank will likely still offer you a debt consolidation loan if you have a decent job.  The loan rate of interest will not be as low as in the case of HELOC since there is more risk for the bank, but it will still likely be preferable to what you had been paying.  Even a few percentage points can make it well worth your time.

Set Yourself Up For Financial Success

For people who are in extensive debt in several places, DO NOT get caught in the cycle of taking out maximum length loans on expensive items that you can’t afford, and using one credit card to pay for another.  This quickly results in much of your income going to straight into other people’s pockets in the form of interest payments.  No only that, but since you have been accustomed to living above your means even when you had access to all of your income, it can be a terribly difficult cycle to break.  It is much easier to stop the spiral in its tracks by getting a single debt consolidation loan.  Most people that have success with this strategy commonly report that the satisfaction of only seeing one debt number that they can focus on and pay down every month is one of the main reasons they were finally able to climb out of the debt hole they were in.  It’s a simple concept that credit card companies hope you’ll never figure out!

 

About Teacher Man

TM is a self-professed nerd about all things related to personal finance. He can be found writing for My University Money, Young and Thrifty, and Canadian Personal Finance Blog. TM blogs in order to continue his quest for lifelong learning and hopefully to help others along the way.

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