As is too-often said, there are no free lunches. Nowhere is this more true than in the arena of debt. While there are strategies for paying off debt more effectively, at the end of the day it still must be paid. Enter debt consolidation loans.
While debt consolidation loans can be a very useful tool to pay off high interest debt (such as credit cards), they do not eliminate or reduce the debt. The Consumer Financial Protection Bureau warns of unscrupulous debt settlement companies that present themselves in their advertising as debt consolidation.
(Side note: What is debt settlement? When you enter into a debt settlement agreement, the creditor agrees to accept a payment less than the full amount owed, and cancel the remainder. You may still be responsible for paying penalties and fees. The transaction is recorded as debt settled on your credit report, and there may be tax implications as well.)
So what is debt consolidation? When you take out a debt consolidation loan, you are simply exchanging one type of debt for another. For example, if you have three credit cards, you could take out a debt consolidation loan in an amount equal to the balance of the three credit cards and pay off the card balances. Now your only monthly payment is for the new debt consolidation loan. But you still owe the exact same amount in total…just to a different company.
So why bother? If you have a strong credit score, you may be able to achieve a much lower interest rate by using a debt consolidation loan to pay off credit card or other high interest debt. This will save you money obviously, and speed up the time until you are debt free. And you will benefit from the simplification and discipline of having just one, consistent payment to make each month over a defined period of time, which you can set up to pull from your bank account automatically.
But beware! A debt consolidation loan can just as easily lead you to a worse place than you were before. If you have not addressed the underlying reasons that led to the debt, the likely result is that you will have the debt consolidation loan debt plus new debt accumulated on your credit card. Debt consolidation only works when you have eliminated the spending decisions and circumstances that led you to have debt. But done correctly, it can be a very powerful tool for getting out of debt.
Having debt is a burden, but creating a plan for debt freedom can be its own kind of burden. Knowing where to start, what’s realistic, and how to handle decisions like consolidating can be overwhelming. That’s where Hey Money comes in. Our experts are not only knowledgeable on all things debt, but they are also specifically hired and trained in empathy because finances require a sensitive touch. To learn more about how Hey Money works and how you can get started for just $19.99 a month click here.