Debt consolidation can be a good solution for people struggling with debt. However, it is best employed under a specific set of circumstances to derive the full benefit. Here’s how to know when to get a debt consolidation loan.
For starters, you should only seek a debt consolidation loan when you have high debt. This will boost the potential benefits you can achieve. In contrast, if you have a low amount of debt, chances are good. You will be better off paying down your outstanding balances on your own.
High Interest Debt
With the average personal loan interest rate right around 9.5 percent, high interest credit card debt can be consolidated to your advantage quite successfully. After all, credit card debt routinely carries double figure rates. Any rate reduction you can achieve can mean less money out of your pocket overall.
Your Debt Burden Is Still Bearable
This might sound counter-intuitive; but it’s best to consider debt consolidation loans when your debt burden is still bearable. The exact line of separation between bearable and unbearable can see a fair amount of variation from individual to individual.
However, one potential example would be debt obligations not exceeding 40 percent of your monthly income. If you have debt obligations that exceed that figure, you might want to consider debt relief rather than debt consolidation.
Reliable Cash Flow
Debt consolidation only works when you can meet the resulting debt obligations with ease. You need to make sure your cash flow is both solid and continuous. You can run into serious trouble if you don’t have the cash on hand to cover the payment each month.
You Won’t Get Into More Debt.
In some cases, people have been known to get into more trouble when they choose to consolidate their debts. Essentially, they see their credit cards and other sources of credit have been cleared and succumb to the temptation to charge again.
The result, predictably, is more indebtedness, even though you set out to make your existing debt more manageable. To prevent this, make sure you have a plan in place to avoid borrowing more money after consolidating your debt.
Good Credit Score
A good credit score gets the low interest rate you need to reduce your overall payoff amount. In some cases, you might not be able to access consolidation products at all if your credit score is meager. It will be your advantage to spend some time burnishing your credit score before applying for the consolidation.
With all of that said, yes, you can get a consolidation loan with fair or poor credit. However, the benefits of doing so are dubious at best. You’ll almost certainly have to pay a higher interest rate, which will minimize the potential effectiveness of the consolidation.
So, How to Know When to Go?
The best way to know when to get a debt consolidation loan is to pay close attention to your financial situation. You need to get the timing just right for it to make a difference. You’ll need to see trouble coming and get the loan before it actually arrives.
It’s also a good idea to avail yourself of professional assistance to be certain you get it just right. In this, as in so many other things in life, being fully informed is the best way to safeguard your financial well-being. The good news is a debt consolidation loan can be an effective strategy when carefully deployed.