The last few years have been rough for most household owners in the U.S. Since the economic doldrums in 2007/2008, the global economy has struggled to stabilize. This has taken a toll on most households that have been trying to repair their financial situations. The slow economy today means most people are struggling to repay their debts.
If you are struggling to pay your debt, it is highly likely that your credit score is also low. This means you can’t access any more credit. Well, you might have heard about debt consolidation, which financial advisors say is a good idea to get out of a financial rut. Why not take a deeper look at the reason debt consolidation has become a prominent feature in the financial landscape?
The Increase in Household Debt
For instance, the Federal Reserve says the average credit card debt in American households is $15,863. The average auto loan in households is $27,000 and $48,000 for student loans. The Federal Reserve says that while household debt has fallen since 2008, it is still higher than it has been in the post-war history.
The most frustrating aspect of being in debt is paying multiple creditors at the same time. This not only gives you more stress but it is also hardly possible to manage your finances. Consider you have a student loan, rent, tax and a credit card loan to pay at the same time and you start realizing why most people are complaining about the state of the economy.
The interest rates are high and repaying all these loans can drain your finances. This means you will go into more debt trying to make ends meet. They say that when you are in a hole, you should stop digging and this applies aptly when you are in debt. Getting more loans from unscrupulous lenders will just lead to more problems and you might end up losing your assets. You have seen stories of families living on the streets and it all starts by getting deeper into debt.
Debt Consolidation Meaning
One of the greatest concerns in financial management is the fact that consumers don’t get the information they need. While debt consolidation has been there for a long time, it is not until the last recession that most household owners learnt about it. In fact, most people still don’t understand the debt consolidation meaning yet it could greatly improve their lives.
To put it simply, debt consolidation means combining all your unsecured loans into a single monthly payment. A debt consolidation loan is the most common option and involves taking a new loan with a lender, which repays all the smaller debts leaving you with a single loan to repay. If you have bad credit, it is highly likely that your bank or credit union will turn your loan request down.
Since the recession, banks are more stringent about their lending conditions meaning people with bad credit profiles don’t qualify for most loan products. This is where debt consolidation companies come in handy. These private lenders offer unsecured loans to help you pay off your smaller debt and you will then continue repaying the consolidated loan on the agreed new terms.
What You Need to Know about Debt Consolidation
While most people will run for the easiest option out of their financial problems, the advisable option is to weight the option about what you are getting into. There are debt consolidation reviews that will promise you how easy it is to get out of debt with a particular option, but how real are they?
Always take time to compare the different options around and also use available resources to learn more about how a debt consolidation option is going to help you in the long run. Here are some key takeaways when you are thinking about debt consolidation:
- Debt Consolidation Eases Your Financial Woes
If you are struggling repaying multiple debts, it is obvious this is affecting your household. Budgeting becomes tricky when you have multiple bills creditors at your neck and you might end up failing to meet some obligations. There is nothing as painful as seeing your family suffering and debt consolidation can offer some relief. By combining your debts into a single repayment, you will have some peace of mind and it is easier to prioritize on your family finances.
- Avoid Changing Unsecured Debt into Secured Debt
If you own a home, it is possible to use a home equity loan to consolidate your debt. This seems like an easy way out but have you considered this; if you are repaying credit card debt and other unsecured loans, you have just turned your unsecured debt into secured debt. This means your home is now collateral and in case your finances get worse, you could lose your precious investment.
Defaulting on your credit card is not as bad as losing your home so be sure to pick a debt consolidation option that does not involve using your assets as collateral.
- Debt Consolidation is not a Magic Wand
There is a misconception with most borrowers that debt consolidation solves all problems. Every financial advisor will tell you that the best way to get out of debt is by planning your finances. If you are spending more than you are earning, you will definitely fall back into debt. Debt consolidation is a good option if you are going to minimize your spending to avoid falling back into the same hole. In fact, some debt consolidation options will involve freezing your credit card accounts until the loan is repaid because the idea is to help you get out of the current situation.
There are different debt consolidation companies around. To find the most reliable, read online top debt consolidation reviews. In addition, ask for recommendations from friends to find out about the reliability of the company you want to use before signing up for any loan. Debt consolidation is a great way to start reorganizing your finances and if you use the right lender, you will be back on your feet before you know it.