#248: Debt Consolidation: What You Need To Know
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What is the main topic discussed in this episode?
Some people do better with debt consolidation because it simplifies things. It might take three loans and turn it into one. Others do better at keeping their accounts separate and just paying them off strategically. What matters more than the method here, than the method you choose, is the behavior. Hey, this is Alison Baggerly, and welcome to the Inspire Budget Podcast, where we talk all about budgeting, debt, and saving money. If you feel like you're doing everything you're supposed to be doing with your debt, you're making your payments every month, but somehow you're just not getting ahead. This is for you. Debt consolidation gets talked about a lot.
What is debt consolidation and how does it actually work?
Sometimes it is presented as this magical fix. Other times it is warned against like it is just a no good, very bad, terrible idea. And the truth is debt consolidation is neither of those things. Today, I want to walk you through exactly how debt consolidation works. I'm going to share the two most common ways people consolidate their debt, what to look out for, and how to know if it actually makes sense for you. Debt consolidation is one of those topics that sounds really simple on the surface, but can really be confusing when it comes down to actually looking into it.
How does a debt consolidation loan combine credit card balances?
So let's break it down. What is debt consolidation? At its core, it just means combining multiple debts into one. It does not erase your debt. It does not suddenly make it disappear. And it is not a reset button. It is a financial tool that can help with organization and interest if it is used intentionally and correctly. There are two main ways that people do consolidate their debt, a debt consolidation loan or a balance transfer credit card. I'm going to walk you through both step by step. Let's start with a debt consolidation loan. Let's say you have a few credit cards. They all have balances and they all have high interest rates and they each have their own minimum payment and due date every month.
Because the interest rates are high, a large portion of what you're paying every month is just going towards interest, not the balance itself. This is where a debt consolidation loan comes in. A debt consolidation loan takes all of those card balances and rolls them into one new loan. So instead of multiple credit card balances, you now have one balance, one interest rate, and one monthly payment. The way it works is that you get a loan, a debt consolidation loan. The loan is funded. You use that loan to pay the credit cards off. So those credit card balances hopefully go to zero. You're no longer juggling multiple due dates or trying to remember which card to prioritize. Your focus changes. It shifts to just one payment, the debt consolidation loan.
What are the real benefits and hidden downsides of a consolidation loan?
Now, there are some real benefits and upsides to a debt consolidation loan. Often, the interest rate on the loan is a lot lower than you're going to get with credit cards. It's easier to manage one payment than have all of these different payments. And you usually have a clear payoff timeline. You have a fixed monthly amount, a fixed timeline, and it's just easier to deal with. However... There are some important things that you need to be careful with. And my goal here is for you to truly understand how this works so that way you don't make some common mistakes. First, you still owe the same amount of money. If you have your three credit card balances that totaled $10,000 and you take out a $10,000 loan to cover that, you still owe the same amount.
The monthly payment can also be higher if the loan has a shorter term so if you have a loan that has a goal to pay off within the next five years that monthly amount you're making that monthly minimum payment might be higher than the minimum payments on your credit cards were and some loans do come with fees now this is the part that really matters and if you are sidetracked please hear me out here okay this is what's so important If you use a loan to pay off your credit cards, but then you start using the credit cards again, you have your loan that now has all of the credit card debt on it.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–0:40
2
What is debt consolidation and how does it actually work?
0:40–1:17
3
How does a debt consolidation loan combine credit card balances?
1:17–3:03
4
What are the real benefits and hidden downsides of a consolidation loan?
3:03–4:57
5
How can consolidating with a loan make your payments higher or lower?
4:57–7:52
6
How does a balance transfer credit card consolidate debt and when does it save money?
7:52–11:11
7
What fees, time limits, and risks should you watch for with balance transfers?
11:11–13:43
8
How do your habits and a larger plan affect whether consolidation will succeed?
13:43–14:36
Speakers
1 identifiedMore from Inspired Budget
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