22 Jul

How Does Debt Consolidation Work?

One of the main reasons that people seek to live a frugal life is because they feel stressed out about money. The single biggest cause of that financial stress is debt. By learning how to reduce (and eventually eliminate) your debt, you can significantly reduce the amount of stress that you feel about money. This can lead to a much better experience with frugal living. One key method that you might use to reduce your debt is debt consolidation. Let’s take a closer look at what debt consolidation is all about.

What Is Debt Consolidation?

Debt consolidation simply means that you take all of your debt and put it on one bill. Instead of having a house payment, a car payment, and multiple credit card payments you consolidate all of that debt under one loan.

What is The Purpose of Debt Consolidation?

There are a few different reasons that people will choose to do debt consolidation. The most common reasons include:

• Reduce the total amount of debt owed. In some cases, you can reduce the total amount of debt that is owed by consolidating everything together. This happens when you work with a lender who is willing to pay off all of your debts in exchange for becoming your sole lender. This isn’t common but it is one reason that people will consolidate debt.

• Reduce the monthly amount of debt owed. The most common reason that people choose debt consolidation is because it typically allows you to reduce your monthly minimum payments. Instead of making minimum payments to a variety of different lenders, you make only one payment per month. If you are able to negotiate a good interest rate on that single large loan then you can significantly reduce the minimum monthly payment on your debt.

• Pay off debt more quickly. If you reduce your minimum monthly payment then you can pay the same amount that you’ve been paying monthly but reduce your debt more quickly.

• Reduce total interest paid over time. When you reduce your minimum interest payments and pay off your debt more quickly then you decrease the actual amount of interest that you’ve paid on the loan. In other words, you save money in the long run by doing debt consolidation.

• Have more organized bills. Some people choose debt consolidation simply to reduce the stress of paying multiple bills each month. People who have too many bills to pay may make mistakes in billing dates and fail to make on-time payments which can result in financial penalties. This is much less likely when you only have a single bill to worry about.

Options for Consolidating your Debt

There are clearly a lot of good reasons to consolidate your debt. So how do you go about doing that? There are a few options available to people who are seeking debt consolidation:

• Refinance your home mortgage. People who own their homes may opt to refinance their homes to obtain enough money to cover all of their debts. They use the extra money to pay off all of their credit cards, auto payments and outstanding medical bills. The entire debt is then consolidated into the home mortgage payment.

• Transfer all balances to a single credit card. People who have a credit card with a large credit limit can opt to transfer all of their credit card balances and other loans to that one card. There is then just a single bill under that card.

• Take out a personal loan. Some people will be interested in consolidating but they won’t have a home mortgage or credit card that allows them to do this. You may be able to take out a personal loan to cover all of the costs. There are even loans specifically designed for the purpose of debt consolidation which are offered by some lenders.

• Work with a debt consolidation company. There are companies that specialize in doing debt consolidation. They typically pay off all of your debt for you and then you pay them a single monthly payment. Be aware that there are some companies that offer legitimate debt consolidation loans but others are scams. Look carefully at the reputation and terms of these companies before choosing this route.

• Get help from family members. Some people have the option of borrowing money from a family member. This money is used to pay off outstanding debts and then you only owe one bill to the individual who lent you the money.

Before Consolidating your Debt

Debt consolidation is usually a smart move but it can have its drawbacks. Before consolidating your debt, you should consider the following things:

• What are your debt consolidation goals? You should know what your reason is for consolidating your debt so that you can make the smartest choice about how to do it.

• Will debt consolidation lower your monthly payments? You want to make sure that the loan that you choose is not going to further strain your finances in any way.

• Are the terms of the debt consolidation plan solid? In other words, if you consolidate your debt now to get a lower interest rate, is that rate going to remain low for as long as you need it to in order to pay off the debt?

• Are there any low-interest debts that you want to keep out of consolidation? If you have a large debt that is currently at a lower interest rate than the rate of debt consolidation then you probably don’t want to include that one when you consolidate your debt.

Living Frugally to Maximize Debt Consolidation

Once you have decided to go ahead and do debt consolidation, you’ll want to focus on frugal living efforts. One of the best things about debt consolidation is that it really simplifies your bills so that you can work on paying down your debt more quickly. If you live frugally, you’ll be able to pay that debt off even faster. Set some financial goals that will help you to create a plan for paying off your debt then opt to live frugally to meet those goals.

Living Frugally After Your Debt is Gone

You may (hopefully) still choose to live a frugal life even when you no longer have any debt. However, you’ll be doing so for happier reasons than simply trying to stay ahead of your bills. You may choose to live frugally so that you can enjoy a simpler way of life, be in better harmony with the environment or focus on creative or spiritual goals. (Learn more about this by reviewing the major frugal living philosophies.) Identify what your new frugal goals are and live in accordance with them by keeping your debt under control!

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