When it comes to personal finance, I’m a strong believer in simplicity. Although I’m still trying to break the habit of claiming to be bad at math, I know that the more complicated my financial plan is, the less likely I’ll be sticking to it.
That’s the thing about personal finance. There’s a logical element, in which we focus on the choices that make the most financial sense. And then there’s the emotional element, in which we recognize our abilities and limitations and try to find a balance that will challenge us without pushing us to give up altogether. My emotional element needs simple solutions so that I can maintain motivation towards reaching my financial goals.
This delicate balance between emotion and logic is an important part of making decisions on financial solutions. Problem is, many financial solutions are marketed as blanket solutions — and that can get consumers into trouble.
Case in point: debt consolidation. In the right circumstances, debt consolidation can be the key to breaking through the clouds of a tough debt journey. In other cases, it can lead to even more debt. It all depends on your situation and, well, your emotions.
Defining Debt Consolidation
Debt consolidation is a simple concept that’s often defined incorrectly. Debt consolidation is the act of using new credit to pay off debt. This can take the form of a loan or credit card that pays off multiple other loans or credit cards and it often comes with a lower interest rate. A lower interest rate combined with making only one payment equals the simplicity and financial benefits that can help you pay debt off faster.
But if you were to research debt consolidation right now, chances are you’d see a lot of results for debt management and debt settlement companies. Let’s be clear: debt management and debt settlement are not the same as debt consolidation. These companies promise you debt relief that takes on a different — and sometimes costly — format.
You don’t need a company to consolidate your debt for you. You can consolidate your debt through a balance transfer credit card, a home equity loan, or an unsecured installment loan such as peer-to-peer loans. Once approved, the new credit will be used to “purchase” and pay off your debt so that you’ll only have one payment to make moving forward.