Get Out of Debt Part 4: Debt Consolidation

Most of us likely have too much stuff in our lives. We have cars, clothes, books, games, memorabilia, etc. It is all stuff which takes up space and adds no real value to our lives. The same is true of debt. None of us need debt, nor does it add any real value to our lives. So, in the idea of downsizing and clearing out space, why not downsize your debt?

Consolidation Benefits

One of the best things about debt consolidation is that it can help you get our of debt much quicker. This is one of the things I have worked with clients over the years to understand. We have talked before how debt can be a tool in the right hands. Well, this would be that instance. Imagine owing the following:

Car: $35,000 with a payment of $475 a month

Student Loans: $25,000 with a payment of $325 a month

Credit Card: $15,000 with a payment of $400 a month

Mortgage: $180,000 with a payment of $1,200 a month

You have a total monthly payment due of $2,500! What if you were able to decrease that monthly payment? Imagine what how much better you would be able to feel at the end of every month if you could be saving an extra $200-$300. You could use it to save or to apply right back to the principal of one of the debts!

Making It Work

The theory behind making debt consolidation work is beyond simple. You will take out an additional form of debt to pay off a current form of debt. However, this new form of debt will either have a lower interest rate than all or most of the debts you are looking to consolidate. Same scenario as above, but you are able to take out a personal loan for $40,000 with a 15 term. The interest rate is higher than your current student loans, but over 15% lower than your current credit cards. Your payment on it would be about $350 if you decide to do it. You have now replaced your $325+$400=$700 a month payment with $350. This is a $350 savings every month, and would provide you the additional $350 to apply back toward the principal of the debt you just consolidated. You would not only save a ton of interest by doing it this way over the life of the loan, but you would also be able to get rid of your debt that much faster.

Overall debt consolidation can be a simple tool which can be used to make your life easier. However, please keep in mind if you are in a bad spot with your credit score or other issues, you might have some barriers to achieving this.