It’s all very well saying “neither a borrower nor a lender be” but in the real world, borrowing and lending are just part and parcel of life for most people and generally speaking there is nothing really wrong with it most of the time, sometimes, however, it can get out of control. If you’re already in debt then consolidation may be a good move, however if there’s one money lesson everyone needs to learn, it’s to think a little before they act, so here are four points to consider.
Consolidation is only worth it if you have a reasonable chance of paying off your debts
Used astutely consolidation should make it easier to pay off your debts, but if it does not make it easy enough then you need to look at other solutions, which range from a debt-management plan agreed with your creditors to bankruptcy. This may not be appealing options, in fact you could argue that they’re not meant to be, but if you have little to no realistic chance of paying off your debts even after consolidation then you may be best to forget about trying to consolidate and just work on creating a solution which will get you out of debt one way or another.
Be clear about the end goal of your consolidation
Obviously you will need to check the sums for your particular situation, however be aware that some consolidation schemes can lower your monthly payment but increase the amount you pay back overall. You may consider this acceptable, particularly if you have reason to believe that your financial situation will improve and that you will then be able to move to an alternative solution which will bring your costs down. If this is your plan then be sure to check the terms and conditions of any loan to ensure that this is permissible.
Double check your consolidation payments leave you with a feasible budget
A feasible budget is basically one you can reasonably live on for the term of the loan. You cannot live off baked beans on toast for every meal for an extended period, so you need to budget for basic lifestyle necessities and remember to allow for expenses such as haircuts and new shoes. You also need to allocate funds for replacing everyday household items from mops to washing machines and also to build an emergency savings fund, which is for exactly that, emergencies, not foreseeable expenses and certainly not discretionary ones. Even if you are keen to consolidate your debts as quickly as possible, it’s very worth taking the time to get this budget right. Ideally try living off it for a few months and see how you manage, before committing to it over the longer term.
Make sure you only consolidate the debts you need to
Simplicity is very appealing to most people and it’s understandable that there can be a lot of appeal in just having one monthly payment to manage. At the same time, however, it is counterproductive to consolidate debts where you had a better deal with your original lender. This is where it is really important both to do your sums and look at the overall picture. It’s fairly straightforward to get a better deal than anything offered by the average credit card lender (excluding special offers such as balance transfer deals) but the less interest you have to pay on a debt in the first place, the less there is to gain by consolidating it. This is where the bigger picture may come into play. For example if you have financing on a car you may need to pay it off before you can sell the car. If you are in a position to live without a car (or trade down) then it may be worth consolidating your car loan so that you can sell your car and put (at least some of) the proceeds towards your debt. If, however, you are not, then you may be best to keep your original car financing.