Having a large debt can negatively affect your life in a number of ways. 

First and foremost, it affects your pocketbook. A huge debt load hanging over your head means that you will have to use some of your income just to pay the interest, which reduces your available cash for other needs and requirements. 

Having a high level of personal debt can also be an emotionally taxing situation. It can lead to feelings of shame, depression, embarrassment, anger and/or anxiety. Indeed, some studies have shown it to be associated with higher diastolic pressure, along with poorer self-reported general and mental health. Although scientists have yet to fully explore the connection between debt and health, it is no surprise that this situation is becoming more and more common, as American household debt has more than tripled since the 1980s. 

This kind of toxic debt is not something anyone would choose to experience if they had the choice. Unfortunately, an unsustainable debt load is the reality for millions of people around the world. Because of high interest rates, people struggle to pay their debt off for years, sometimes taking on extra jobs and spending less time with their friends and family in the process. Perhaps lulled into a false sense of security, they pay the minimum payments, believing they are making inroads towards solving the problem. They are mistaken. 

The fact is, without a serious change in income (upwards) or standard of living (downwards), these people may find themselves deeper in debt than when they started. If you are one of these people, you’re familiar with these concerns. However, it’s not all bad news. Certain tools and strategies do exist, and it is possible to escape your debt. One of the strategies that may help you is debt consolidation

What is Debt Consolidation?

When a person is in debt, they owe money to a creditor (or multiple creditors) for goods received or services performed. Not only is the principal amount owed, so is interest. Many people use credit cards, and most credit cards have annual interest rates up around 20%, with some interest rates being even higher. Owing multiple creditors high interest rates without an infusion of cash is simply unsustainable in most cases. 

Debt consolidation, which is a form of debt refinancing, can be the answer by combining all the debts into a single package, and then taking on a payment with a lower interest rate to pay off the new, consolidated loan. These loans can take many forms, but usually they are either personal loans or home equity loans. In many cases, debt consolidation loans offered by lending institutions take the form of a second mortgage or home equity line of credit.

Advantages and Disadvantages of Debt Consolidation

Consolidating your debt is a positive measure, and takes some of the pressure off by:

  • Simplifying the process
  • Lowering your monthly payments
  • Helping you create a repayment timeline
  • Boosting your credit score over time
  • Giving you a sense of control in a difficult situation

 

However, there are some possible negative outcomes that can arise, and it is important that you also consider some of the disadvantages involved in debt consolidation. 

For example, if you were to take out a new loan to pay off the consolidated debt, you might choose a loan with a variable interest rate. This is an inferior choice than a fixed-rate loan, because it’s possible that your rate could go up. 

Another consideration is that you might end up losing some of your assets, particularly if you put your home on the line as as collateral with a home equity loan. In these cases, creditors might be able to take your assets if you don’t stick to the repayment plan to the letter. 

Consolidated Debt: A Good Idea

When it comes down to brass tacks, consolidating your debt is almost always a good idea. As long as you are able to secure a lower interest rate than your current situation, you’re moving in the right direction.

Qualifying for a consolidated loan, however, requires you to meet certain conditions.  Qualification can depend on factors such as your existing credit score, your current level of income, as well as other factors. To find out more about qualifying for a loan in the context of consolidating your debt, make sure to contact the experts at Lend For All.