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What is Debt Consolidation? 

Few words in our language can inspire as much anxiety as the word “debt.” This applies doubly for Americans.  That’s because so often we associate our general well-being with our financial condition. None of us wish to take on debt.  In some cases, though, debt is simply an unavoidable part of trying to get ahead. Millennial Americans, for instance, commonly need to take on significant amounts of student loan debt to complete higher education. Mortgage debt is also extremely common.  That’s true, not only for millennials but for prior generations as well. In our rush to show status, we often accept debt loads which can take years to resolve. In this post, we will discuss the long-term debt resolution strategy known as debt consolidation.

Future Consideration

Debt is a topic which we will explore more and more frequently here on our blog. In part, that’s is because debt resolution is one of the main areas of our practice.  Another reason is because it’s imperative that all Americans get a better grip on their financial future. As a nation, we’re saving less and more often living beyond our means.  These are two things which we need to change in order to get ourselves back on track. We’ll examine when a debt consolidation strategy makes financial sense, and when it may not make sense. As we’ll see, whether debt consolidation is right for you depends on your particular circumstances.  Accordingly, a proper evaluation of a debt consolidation strategy necessarily must be performed in view of individual facts and circumstances. 

Basics of Debt Consolidation 

Consolidating debt is a strategy whereby multiple loans are paid off in a single payment. This is accomplished by taking out a separate personal loan, or acquiring a separate credit card.  Either is then used to pay off the balances on the existing loans. These options might be unappealing or unavailable, though.  If so, it might be possible to take out a home equity loan or 401(k) loan.  Significantly, though, both of these options have potential negative consequences more severe than the first two options. For example, if you fall behind on either your personal loan or credit card repayment, you risk your credit score.  If, however, you fall behind on a home equity or 401(k) loan, you jeopardize either your residence or retirement. 

Example

Let’s take a look at a scenario in which debt consolidation may be a desirable option. Suppose you have significant credit card debt from four different credit cards. You might pay each of these obligations on time.  Yet the credit cards may have different interest rates and different due dates.   Under those circumstances, consolidating them may be in your best interest.  That’s particularly true if you can obtain a better interest rate from a single source. Maybe you can acquire a new credit card or personal loan with a lower interest rate.  If so, you could immediately pay off your existing credit card debts.  You could then take advantage of your new, lower interest rate.  That would allow you to reap a substantial financial benefit in the long-run. Having a single payment, and therefore, a single monthly due date, also means less work and overall hassle.

The Pros & Cons of Debt Consolidation

As stated, a careful analysis of an individual’s financial facts and circumstances needs to be made. That permits an accurate determination of whether debt consolidation is a solid strategy in a given case. The scenario just described is a good example of a case in which debt consolidation may make sense.  There are, however, instances in which consolidation may not be desirable. They include if you’re unable to acquire a personal loan or credit card with a favorable interest rate.    The alternative, consolidating with a home equity loan or 401(k) loan may not be worth the risk. Rather, it may be more sensible to simply continue paying off debts separately.  Consolidating them and risking the potential of losing a home or jeopardizing a retirement is a big risk.

When Debt Consolidation Makes Sense

In general, debt consolidation only makes sense as a strategy if you have good enough credit to obtain a favorable interest rate. Conversely, if obtaining a rate which is substantially lower than those on existing obligations, then consolidation may not be worth the effort. Also, if a debt load is too large, then debt consolidation may make less sense when compared with other strategies.  These include making smaller, lump sum settlements, or even bankruptcy. Whatever the situation, it’s important to develop a realistic, viable plan to reduce and ultimately eliminate debt.  The alternative is to jeopardize a long-term financial future.  

Call A New York City Tax Attorney For Help

As with practically any financial strategy, it’s important to carefully consider the facts of each situation.  You can then make an informed decision about the potential effectiveness of debt consolidation. If an individual has the right debt to income ratio and credit score sufficient to embark on a debt consolidation path that makes financial sense, then serious consideration should be given to it. On the other hand, if consolidation opens an individual to unreasonable risk, or if circumstances don’t merit consolidation, then it might be best to consider other options. The attorneys at Mackay, Caswell & Callahan, P.C. are well versed in debt resolution issues.  We’re more than willing to assist you if you have a case of this kind. Don’t hesitate to contact a top New York City tax attorney today if you need any assistance in this area. 

Image credit: CreditRepairExpert