Knowing when it’s time to consider debt consolidation

What is debt consolidation, and is it something that might be right for you? You have likely heard the term before, but might not be entirely certain what it means. While there is sometimes a negative connotation attached to the idea of debt consolidation, it can be a helpful tool for the right person. Here’s a quick overview of what consolidation is, how it works, and who benefits from it.

What does debt consolidation mean?

So, what exactly does it mean to consolidate debt? This is a practice where all of your existing debts are rolled into one debt. As a result, you make one lump sum payment, with one interest rate, each month. Often, the interest rate is lower than some of the rates you were dealing with from your other debts. Debt consolidation doesn’t mean your debts go away and you don’t have to pay them. In the long run, you are still making full repayments. The only difference is that you are making your payments in one big chunk at a time, instead of multiple payments with different interest rates. 

When might it be an option for you?

People might consider debt consolidation for a couple different reasons. Often, borrowers use this option when they are struggling to manage their debt on their own. If you have monthly mortgage obligations, credit card payments, and other bills due, you might find it hard to manage all of these debts. Consolidation is meant to simplify your payments. This could be a good option if you can secure an interest rate low enough to make it worth the process. Usually, those with good credit are able to lock in a lower rate that makes a big difference in their debt management. Debt consolidation is also a good option for people who need to simplify their repayment plan. Since it combines all your debts into one, consolidation automatically makes it easier to stay on top of your financial obligations.

Pros and cons

There are a few obvious advantages to consolidating your debt. First, as we mentioned, this process means securing a lower interest rate. This will take some of the pressure off your payments and provide you with a little more breathing room. Lower rates mean smaller payments. Next, debt consolidation makes it much easier to keep track of your debts. By combining your payments into one, you won’t neglect or forget any of your obligations. Late or missed payments can cause a lot of trouble, and this simplified process helps you avoid it. Finally, consolidation can help you on your path to debt recovery. If you’re having a hard time making your payments and staying afloat, this can be a good option.

However, debt consolidation certainly has some drawbacks. First, it can cause a temporary drop in your credit score. When a lender runs a credit check for this loan, this inquiry can result in a score reduction. The good news is this is a temporary disadvantage. As you make timely payments, you will build your score back up. This brings us to the second potential drawback, which is that debt consolidation is generally a longer-term option. People who use this tool have to commit to it in order for it to have a positive impact on their debt and credit. This requires dedication and is important to consider before locking in.

Contact a broker first!

Debt consolidation is something you need to discuss with a mortgage broker before you take any action! We can work together to learn if this is the right option for you, and if so, the best way to get started. Consolidating your debt is a fairly large and serious decision, and it’s not one you want to make without getting a broker involved. We will also evaluate your situation to see if there are other solutions available. This way, you can be certain you are taking the best path for you.

Debt consolidation can seem complicated, but we’re here to help make it simple. If you need to discuss your finances or work out a plan moving forward, it’s important to reach out.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.