Without a doubt, consumer debt has become a major problem in North America, with the average household debt exceeding $100,000, North Americans have been forced to find ways to lower and eliminate their debt. Of the many options available, debt consolidation has become perhaps the most pervasive form of debt solution on the market, but does it work, and is it worth it?
Debt Consolidation in a Nutshell
In a nutshell, debt consolidation allows you to “move” your debt over to another lender at a lower interest rate. In theory, by having a lower interest rate, your debt becomes more manageable and you become able to pay down your principal amount faster. Though debt consolidation is simple in theory, the number of options available to you can quickly make the topic a complicated one.
Options Available to You
In the world of debt consolidation, there are typically three primary ways to consolidate your debt. Perhaps the most popular is through the use of debt consolidation loans. Debt consolidation loans allow you to take a loan from a lender, at a lower interest rate, and use it to pay off your other existing debts. Another common way is through refinancing your mortgage. Mortgages commonly have lower interest rates than other forms of debt, by refinancing you will be able to pay down your debts while carrying the debt over to your mortgage principal, which likely has a much lower interest rate. Lastly, you may be able to consolidate your debt through a debt management program. Debt management programs are ideal if you are unable to make your payments. Debt management companies will have you pay them directly, and then will then pay your former lenders themselves. This option will impact your credit score.
What’s the Best Option?
The best option will depend on your life situation. If you are able to, a debt consolidation loan may be your best bet. It will allow you get lower interest rates, will not impact you credit negatively and ensures you don’t have to put personal assets at risk. If you are unable to get approved for a loan, refinancing may be a good option. It will allow you to pay lower interest rates, however, you will lose some of the equity you have built up in your home as a consequence. As a general rule, a debt management program should be your last option. A debt management program will allow you to pay off your debt at lower interest rates, but will negatively impact your overall credit score and financial wellbeing.
So is it Worth it?
The simple answer is yes. If you are able to consolidate your debt and achieve a lower interest rate, you should. However, here a few things to keep in mind before embarking on your debt consolidation journey:
- Even though you have consolidated your debt, you will still have to make minimum monthly payments
- Avoid debt consolidation options that promise to completely eliminate your debt, this is more than likely fraudulent
- If possible, avoid debt consolidation options that will have a negative impact on your credit score
- Consider creating a budget plan to help ensure you are able to manage your debt payments after consolidating
- Only use personal asset as collateral when no other loan options are available to you