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It doesn’t take long before debt can accrue to levels that become difficult to sustain. Debt consolidation can offer either a powerful solution or a yet greater challenge to overcome. Here we will examine the questions to ask yourself before deciding whether this tool can improve your cash flow and debt payoff plan.

Debt can accumulate in a number of ways. Sometimes it’s as simple as not paying attention to the shopping bills, or it’s as unforeseeable as a surprise visit to the emergency room. Debt might have been honorably taken on as an investment in the future: a business loan or a student loan, for example. At other times, it may just be a personal loan which is needed to bridge a difficult period of low cash flow.

If you find yourself struggling to meet the monthly payments on your debt, whatever the reasons might be, you may have the option to consolidate multiple debts into one single loan. This consists in taking out a single loan which is used to pay off the existing loans.

Whether this makes sense in a particular case depends on a few factors. The purpose is not to consolidate for the sake of simplifying only; it is to ultimately save money and, hopefully, time as well. Here we will examine the top questions to ask yourself before deciding whether debt consolidation can benefit you.

Can You Achieve a Better Interest Rate?

The first things to consider are the details of each loan:

• Amount owed
• Interest rate
• Monthly payment
• Remaining life of the loan

By shopping around for the options available to you, the fastest way to get a clear idea of the available rates is to inquire online with a few different lenders that offer pre-qualification for loans. Pre-qualification simply means that, based on the provided information, you are likely to be approved; however, there is no guarantee until the lender runs a full credit check when you officially apply.

If the results come back with a higher interest rate quoted than your existing loans, it’s possible that your credit score has declined since you took out the original loans. On the other hand, if it appears you will be offered a lower interest rate than most, or all, of your outstanding loans, then it’s time to ask yourself the next question.

Do You Have a Plan to Avoid Further Debt?

There is a reason the debt accrued in the first place, and consolidating the debt into a single loan will reset the terms of the loan. While the interest rate may be lower, you may have the option to extend the length of the loan and extend the max debt that can be accrued, which means at the very least that a greater quantity of payments will be made over time. Even if you don’t take on more debt, extending the length of a loan could easily mean you pay more over time even if you’re paying on a lower interest rate.

To complicate matters further, the possibility, and thus temptation, is there to take on more debt because the ceiling has been raised.

A serious question to ask yourself is: have you addressed the underlying cash flow deficit that has led to the accumulation of debt in the first place? If a concrete plan has not yet been put in place for how to meet future expenses without taking on new debt, then consolidating the debt may only provide an avenue with which to dig deeper into the debt spiral.

Working with hundreds of clients over the years, I’ve noticed that there are many wants and needs in life that feel, in the moment, as though they are one-time events not to be repeated. It’s easy to convince oneself that the expense has arisen only this once. But those one-off expenses accumulate; they may not be the same in nature, but they happen more often than most of us realize.

If cash flow continues to be a struggle, it may be time to work with a financial planner or coach who specializes in budgeting. Though they will of course charge for their services, think of this as a long-term investment in your future.

Once you put a stop to the negative cash flow, and learn what’s possible with reorganizing the budget, the benefits will repay you for years to come. This can help get you on a track to freedom before you consider consolidating the loans. If you’ve successfully balanced the budget, congratulations! It’s time to move on to the next question.

Debt Consolidation vs Snowball Payoff

Are any of your existing loans already low interest? Does it make sense to consolidate all of them, or just some of them?

For any loans that are already at a lower interest rate than the proposed new loan for consolidation, you may want to take a closer look at the payoff plan for these particularly.

The reason is simple: a lower interest rate with a shorter amortization schedule (payoff timeframe) might still mean higher monthly payments than a higher interest rate with a longer schedule.

Ask yourself these questions. Are the monthly payments on these existing low-interest loans able to be met with your current income? If this is going to strain your budget, especially for a long time, then it may still be better to consolidate low-interest loans along with the high-interest loans if it lowers the overall monthly payment by extending the timeframe.

While ultimately it’s not ideal to raise the interest rate and extend the life of the loan, it’s usually better to do this than to risk not being able to meet the payments.

If you are able to make the payments of the existing loans, then consider the size of the loans themselves. Are you more interested in freeing up monthly cash flow or in paying as little as possible in interest?

If you’re more interested in freeing up cash flow in the moment, then focusing on paying off these smaller outstanding debts first may be a good option.

If you’re improving a monthly surplus by consolidating the higher-interest loans into one, then you may consider using some of this surplus to make an additional payment on a smaller loan (especially if that smaller loan has a high monthly payment already). By focusing on paying these smaller loans off first, you free up cash flow faster, and can either apply that additional cash to saving up an emergency fund, making extra payments on the next loan, or both.

Conclusion

While debt consolidation is not for everybody, it has potential to offer a positive impact to cash flow and debt payoff in certain cases. Becoming consumer debt-free is an astronomical step toward gaining financial freedom. It lays the foundation by balancing the budget for future wealth accumulation. If you’re debt-free already, you should be applauded. If you’re on the path to becoming debt-free, you are traveling the high road. And if you’re just now starting to plan out your debt payoff, you now have one more knowledge tool in your belt to secure a great future ahead of you!