Debt consolidation is one of the best ways of reducing your interest payments to a single, affordable payment every month. It's also a great way to get organized and reduce your debt burden. There are many options you can choose to consolidate and get out of debt.
You can roll your debt onto a lower interest credit card, seek the help of a professional and reduce your debt payments into a manageable monthly payment, or roll your high interest debt into a relatively lower interest loan.
While all of these are great options, debt consolidation can go wrong as well. For instance, most people get caught up in trying to score the lowest interest rate and forget other important factors that increase debt. Here are five tips for debt consolidation you must remember before putting it into action.
Low interest rates are not most important
Low interest rates are great since they significantly reduce your debt payments. However, most people chase low rates and forget to eliminate the root problem that caused the debt in the first place. Whether it was a lack of fiscal discipline or overspending in a certain area of your budget, the root cause of your debt must be analyzed and mitigated as much as possible.
In some cases, such as student loan debt, this might not be practical. However, if your debt is consumer-related—such as credit card debt or borrowing too much money via personal loans—you must examine your financial habits and practice corrective behavior.
Maintaining a budget is a great way to start examining your financial habits since it forces you to track every penny you spend.
You must also remember that debt consolidation does not magically eliminate your debt. You're still liable to pay the amount you owe. It's just that the additional amount you pay above your principal reduces when debt is consolidated properly. People who fail to practice good financial habits view debt consolidation as an excuse to rack up even more debt and this defeats the purpose of consolidation.
Pay attention to loan terms
The term or length of a loan is an important variable to keep an eye on. In a quest to receive the lowest interest rate, it's easy to lose sight of your ultimate goal: Saving money by consolidating debt. Let's say you receive a reduced interest rate of 5% compared to your previous combined interest rate of 6.5%. That's a significant decrease.
However, if your consolidated loan lasts longer than your original debt, you aren't saving any money. You're merely extending the period you'll remain in...
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