The Implications Of Prioritizing Debt Consolidation
Debt consolidation is an effective strategy for reducing debt and regaining control over one’s financial situation.
It involves paying off all outstanding debts with another loan ideally carrying a lower interest rate.
The idea is that one can save money over the long term by replacing higher interest rates with a lower one.
While this strategy may seem like a good idea, and it usually is, it is not always the best approach for meeting one’s financial goals.
What It Means
Debt is one of the leading causes of stress among Americans. Many feel they are overburdened with debt and it negatively impacts their quality of life.
People in this situation may prioritize reducing their debt through any means possible.
While many debt reduction strategies exist, the one most commonly sought out by consumers is consolidating debt through a consolidation loan.
This is typically done when an individual has many high interest-bearing debts, such as credit cards, personal loans, and payday loans.
The high interest rate makes it difficult to reduce these types of debt because a large portion of the payment goes towards paying the interest.
In this situation, it may be ideal to prioritize debt consolidation by taking out a consolidation loan. The lower interest rate will ideally allow the recipient to make some real progress in lowering their debt load and make the debt less expensive over the long run.
As explained above, the primary benefit of debt consolidation is a lower interest rate if achievable. This lower rate translates to many benefits, the most important of which are listed below.
- Lower Monthly Payments: Sometimes, people let their debt load get out of control, resulting in high monthly payments. Depending on their income level, these monthly payments may have a detrimental impact on the quality of their life. Debt consolidation can be an effective strategy for lowering monthly payment obligations.
- A Road To Debt Freedom: High interest rate debt can take many years to pay off, especially if just the minimum payment is made. When one prioritizes debt consolidation, it means that they are devoting a sizable chunk of their income to paying down their debts. With lower interest rates, debt can be expected to be paid off sooner.
- Lower Overall Cost Of Debt: Depending on the payback term of the consolidation loan, lower interest rates and reduced fees will result in a more manageable overall cost. This is especially true for high-interest debts such as credit cards and payday loans.
Prioritizing debt consolidation is not always the best course of action. Devoting a large portion of one’s income to consolidation payments can leave a borrower without an emergency fund and may also cause them to miss out on an investment opportunity.
A Missed Opportunity To Invest
A safe and secure retirement cannot be achieved through savings alone. People need to make investments, both long and short-term, if they wish to enjoy a satisfactory level of comfort in their later years.
This could include contributing to a 401K, purchasing government bonds, or buying dividend-bearing stocks.
A person who devotes all of their disposable income towards paying down their debts will not be able to make the necessary investments required for retirement. Determining the best course of action depends on the individual's situation, their debt load, and years until retirement.
Lack Of Savings For Emergencies And Retirement
Everyone needs a safety net. An emergency can strike at any moment and being left without some source of emergency funds can make the situation go from bad to worse very quickly. This is also true of retirement, which requires a mix of savings and investments if one wishes to enjoy a decent standard of living in their golden years.
Devoting all of one’s available income to paying down their debt means that they will not have access to liquid cash should an emergency strike. In this situation, it may be wise to consolidate high-interest debt only, leaving the borrower with some funds to put into a savings account.
Prioritizing debt consolidation can be a smart idea, especially for those who feel that their debt load is having significant negative consequences on their well being and quality of life. Anyone considering this strategy should consider both the benefits and the pitfalls of this strategy before applying for a consolidation loan.