Debt consolidation essentially requires you to repay your existing loans and debts with a new loan (one that has a lower rate of interest, preferably) or a balance transfer credit card. Many people believe that debt consolidation is the only thing that can help them manage their debts. While debt consolidation has its benefits, it’s not something that will help you in the long-term if you don’t refinance to the right type of loan. So, here some facts about debt consolidation that you need to know.
- There’s No Guarantee You’ll Get a Lower Interest Rate: The rate that you get on your new loan is dependent on your credit score and your past payment history. Given this, there’s really no guarantee that you’ll be able to get a new loan at a lower rate.
- Low Rates Can Change: If you get a balance transfer card, keep in mind that the APR is likely to be low only for an introductory period, after which the regular rate will set in. So, in this case, you’ll have to ensure that you repay your debt within this period. Not doing so will again attract a high rate on your outstanding balance.
- You May Remain in Debt Longer: When consolidating debts, many people get a loan that has a lower monthly payment than what they are currently paying. While this can be helpful, it’s likely that the payment is lower only because the loan term is actually longer. So, although the low monthly payment may come as a relief to you, it’s important to be aware of the fact that you will most likely be in debt longer and pay a higher lifetime interest charge, as a result.
- Debt Consolidation Does Not Get Rid of Your Debts: Many people mistakenly feel like their debts have been eliminated after debt consolidation. Keep in mind that debt consolidation only restructures your debt, and it doesn’t eliminate it.
- You’ll Have to Change Your Behavior With Money: While debt consolidation can be a good starting point in helping you manage your finances, it can only help in the long-run if you change your behavior with money. So, start by creating a budget, putting together an emergency fund, and making investments in the stock market so you can achieve your financial goals.