Debt Consolidation or Elimination, which is best for me?

A question I often get asked when helping people with their finances is…

“Should I consolidate my loans into one payment?”

Everyone’s circumstances when it comes to debt is different however I hope this article helps you, the reader to determine the right solution for you and most importantly empowers you to make a decision that will move you forward if this is a question on your mind right now.

Let’s explore first consolidation.

One easy payment.

Wow now that sounds attractive especially if right now you are frustrated with all those little payments that are consistently going out however are you really moving yourself forward?

  • Are there fees attached with processing the loan for example brokerage or application fees or terms imposed such as repayment insurance?
  • If so does adding on these costs compound your total debt or does the lower interest rate offset these costs?
  • Has the term of your total indebtedness increased?
  • Does the new loan now take charge or security over a property, vehicle or other item where the existing one is presently unsecured?
  • Have you gone to one easy payment at the expense of a higher debt balance or longer period until you are free from the restraints servicing this debt has put on you?

It is important to consider these factors however even if you have done the sums on the above points it is likely that the most important factor may not have yet been considered, more on that shortly.

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Let’s now explore elimination

There is a lot of advice out there and a thinking that suggests start with your lowest debt and set a goal of repaying this as quickly as you can. This has its merits for sure, you have set a goal, you are now aiming for an outcome, you have created a focus and when completed will be able to celebrate a success. Now that’s got to be a great feeling.

Elimination of debt will take effort, and it’s important to acknowledge having this debt isn’t doing you any good and is stripping away your ability to achieve other things. In order to succeed the first step is to get real about the situation,

It will get better……, when I get my pay rise…..; I’m expecting a tax refund……,

These types of thoughts can often turn out to be false hopes further delaying us taking the real action needed, the actions required to move forward financially.

Elimination is about creating a plan and sticking to it and to be successful with this approach you have to also tackle or address the most important factor.

The most important factor regardless of which option you choose.

It’s a one word question and it’s really simple, WHY? This is the first question I ask anyone i work with.

Why did you buy that car, piece of furniture or new appliance? Was it necessity or impulse? Was it simply trying to keep up with the Joneses?

Why did you rely on the credit card for meeting your basic living costs or funding that holiday or big purchase?

Whatever the reason for most people I work with, the fundamental building block missing is savings. Now don’t tune out here thinking you can never save, you have read this far you might as well finish.

With savings the need for a hire purchase, a loan or dependence on a credit card can become unnecessary. If they are needed from time to time having a portion of savings means the debt can be a short and finite thing. It becomes a calculated decision.

If you’re not saving now then chances are even by consolidating your loans or throwing every spare dollar at your debts in an attempt to clear them your still unlikely to move forward. The next time something unexpected raises its ugly head no savings simply means more debt to sort it out. Therefore whatever option you choose it is important to work out where some savings can be made. Go back and review your budget, if you don’t have one then maybe now is a good time to start. You can trail our budget program free for a month if you don’t have one ‘Click here’ to get started.

So have a truth moment with yourself today, once you can honestly answer the why then you are on your way to creating a foundation for your solution.

If the why was necessity then your solution is likely to work best by including regular savings to lessen the impact of the next necessity that turns up.

If your why was impulse then having savings allows for a little impulse from time to time, often when it appears we have a few extra dollars out impulse buying kicks into gear. It’s amazing how once you know you could actually spend it if you wanted to that you don’t.

At the end of the day both consolidating and eliminating debt through a well-executed plan have merit but both are likely to have a greater success at keeping you from returning back one day if you can incorporate saving into your strategy.

Check out my article “Five steps to stop you going in circles” for a guide to getting started.

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