Questions to ask yourself before getting a debt consolidation loan
debt consolidation loan
Dealing with debt can be overwhelming and you may get to the point where you’re willing to do whatever it takes to get rid of the debt stress. It’s important though before you make any rash decisions that you understand the best course of action for your own personal financial situation.
“One option to reduce your debt load is debt consolidation. It can be a great way to reduce your debt, maintain a good credit rating and increase your cash flow. However, this solution isn’t necessarily for everyone. Before you decide on how to attack your debt it’s a good idea to talk to a professional for advice,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
In the meantime, if you’re considering debt consolidation, there are a few questions to ask yourself to determine if this is a suitable option for you.
Do I understand how consolidation works?
In a nutshell, consolidating your debt means that you combine your debts into one loan with a monthly payment. If you are carrying balances on multiple credit cards, you are probably accumulating a great deal of interest. If you are only making minimum payments you aren’t doing much to reduce your overall debt load, which will just continue to grow.
“By combining all of these payments into one, you attack the principal of the debt more aggressively and free up more cash flow in your monthly budget, which can help you to avoid turning to debt again,” says Schwartz.
Am I able to consolidate my debt?
While the concept of debt consolidation sounds great, not everyone is able to use it. If you’ve got poor credit or don’t have enough income, you may not qualify for a debt consolidation loan from your lender.
It’s important to know that not all debts are able to be included with a debt consolidation loan. Typically, things like credit cards, other installment loans, medical and utility bills can be consolidated, but secured things (like mortgages) cannot.
Am I willing to change my spending habits and credit use?
A condition of a debt consolidation loan is usually that you need to shut down the cards you are consolidating. Sometimes, depending on the situation, you may be able to keep one or more open though. That can be a dangerous thing if the reason that you’re in debt in the first place is that you turn to debt to spend beyond your means.
Are you willing to set a budget and live a cash-based lifestyle, rejecting the “buy-now, pay-later mentality”? If you aren’t then debt consolidation may not be a good plan, as you’ll ultimately end up carrying more debt.
Could I pay this debt off on my own?
Do you really need to get a debt consolidation loan? Is there any chance that you can pay this down on your own?
If it’s a question of organizing your household finances and paying down your cards more aggressively, that might be an option. You may also consider doing a DIY debt consolidation using a balance transfer. If you’ve got room on one card with a lower interest rate, it can be effective to combine your cards on to one and direct your efforts there.