When debt becomes overbearing, many people turn to debt consolidation loans and find that it doesn’t solve the root of their problem. Consolidating your debt may put you in the same situation or worse.
The other option is a debt consolidation loan which comes with more problems than solutions. Combining all of your debts into a loan and extending the loan’s term only accomplishes one thing — lowering your monthly payment in exchange for thousands of dollars in interest over the length of the loan.
Think of what you’ll be doing the week after you consolidate. You’ll be paying your minimum payment that is now lower, it just has more interest added to it. If you don’t consolidate your debt, you’ll be paying your payments without that added interest.
Consolidation still requires you to pay off your debt, it just makes it a higher bar to reach. You’ll also have your credit cards with available balances which won’t be maxed out any longer. Did consolidating your debt make you more responsible? Nope.
The Cambridge Credit Corporation estimates that 70 percent of people who consolidate their debt have the same amount or more two years later.
In addition to the opportunity to backslide and put yourself in an even worse situation, a debt consolidation loan can put a lot more at risk. In order to receive a good interest rate you would need a secured debt consolidation loan. That means you would have to risk your house or other real property and if you backslide and don’t pay off your loan you would lose those. This option could leave you with a consolidation loan, no equity in your home or no home, and if you returned to bad habits even more debt on credit cards.
Now, about that first option. Managing your debt by creating a budget and a debt roll-down plan and changing your negative financial behaviors will pay off your debt quicker than a consolidation loan would.
Unlike consolidating it, managing your debt does require you to change some aspects of your current financial life. First, you have to stop creating debt. You can’t eliminate your debt if you continue to create it. Second, you have to be able to stick to a plan that includes paying off debt and living within your means. A budget created and tracked with Mvelopes alongside your debt roll-down plan can provide an easy-to-use solution that keeps you up-to-date and accountable for your finances.
Working to pay off your debt instead of just piling it up in a different location along with a longer term will save you money in interest and help improve your finances for the rest of your life.
Get started today playing around with our debt roll-down calculator or try the Mvelopes app to get your finances under control.