Consolidating debts can help you regain control of your finances
When one asks a room full of people who are loaning, have loaned, or are applying for a loan? Chances are the vast majority will answer in the affirmative.
In today’s economy, it is no surprise. A central bank report on the Philippine Financial System found that more individuals and families are taking out loans as of June 2024.
While taking out loans is not bad in general—we discuss this in-depth in Earnest, our free personal finance education e-book—there is something to be said about responsible loaning and paying off debts. This has recently become a hot topic on social media, too, as many Filipinos ask for the best way to pay off their debts.
One concept that is seldom discussed is debt consolidation. Hold on, do not click off just yet. Many people shy away from this concept, thinking that because it involves the word “debt,” it means more “utang” that they must consider each month. However, debt consolidation is a financial strategy that simplifies and improves budgeting.
Debt consolidation involves combining multiple debts into a single loan. It entails taking out a new loan to pay off existing ones. This new loan may result in a lower interest rate, monthly payment, or both. By consolidating, you can simplify repayment schedules, ease the stress associated with multiple monthly payments, and potentially save money over the life of the loan. It is important to note that debt consolidation is not the same as “taking out a new debt to pay another debt.” This only creates a perpetual cycle of debt. In debt consolidation, you take out a bigger loan to pay off multiple smaller debts, so you must only think of one payment schedule instead of many.
How it works
- Assess your debts: Determine the total amount of your debts, including interest rates, minimum payments, and due dates.
- Apply for a consolidation loan: Research and compare different lenders to find the best terms and interest rates.
- Receive the consolidation loan: Once approved, the lender will provide a lump sum.
- Pay off existing debts: Use the consolidation loan to pay your debts in full.
- Make regular payments on the consolidated loan: Pay your loan on time!
Things to consider
- Eligibility requirements: Different lenders have varying eligibility criteria, so ensure you meet the requirements.
- Lenders: Consider the interest rates, association fees (including origination fees and prepayment penalties), length of repayment term, and even your relationship and strength of the bank.
- Credit score: Your credit score can influence the interest rate you'll receive on a consolidation loan. A higher credit score may result in a lower interest rate.
Debt consolidation can be a powerful tool. Combining multiple debts into a single loan can help you feel less overwhelmed by your finances.
That said, it's crucial to approach debt consolidation with a strategic mindset. Carefully assess your financial situation, compare different lenders, and consider the potential benefits and drawbacks before deciding. Doing so can increase your chances of better managing your debts and achieving your financial goals.
We talk about this more in our free Earnest e-book.
Disclaimer: This article is for general information purposes and does not constitute formal financial advice. Always do further research before making financial decisions and seek professional advice from a certified personal finance counselor. For more information, read the Earnest disclaimer here.
