If you qualify for a low interest rate and want to stop owing multiple debt payments, debt consolidation might be a good idea. This is a way to combine all of your debt and pay one monthly fee, and potentially get a lower interest rate, all while raising your credit score. Here are the benefits of debt consolidation and how to go about it:
Reduce The Number of Monthly Payments You Owe
When we acquire debt, most of us have several things to pay off, never just one thing. Debt consolidation is one of the best ways to lump all of whatever you owe together and pay one fee each month instead of several.
Debt consolidation may also help you pay off your debt faster. By slimming down to one bill, you’ll likely have an easier time budgeting and may even be able to start paying more than what’s due every month, ultimately paying down your total debt faster.
Decrease Your Interest Rates
One of the biggest benefits of debt consolidation is that you can lower your interest rates. This is not always the case, but when you are paying multiple bills for debt, you likely also have multiple interest rates to keep up with. It can be confusing and make you feel at a loss.
It doesn’t have to be that way. By switching to one monthly payment and one loan, you can more easily choose a loan with a low interest rate. Plus, you’ll end up paying less in interest altogether. It is easier to manage and can help you gain some control in your life.
Improve Your Credit Score
Your credit score can mean the difference between whether or not you can buy a home and how big your car payment will be. It shows that you can pay something long-term and pay it on time. By having only one loan and one payment, you are less likely to forget to pay each month. Keeping track of multiple bills for debt can be tedious. This is a way to limit that risk and bump up your credit score.
Get Better Loan Terms
One of the best things about debt consolidation is that there is a chance you can get better terms (lower interest). You may be able to negotiate the new terms of a new loan rather than be stuck paying on something you had no control over. Plus, when you’re ready to consolidate your debt, you don’t necessarily have to rush. You can look at all the available options out there.
If you’re trying to pay down something like credit card debt, you probably didn’t have a choice in your interest rate. Your rate was probably baked in from the day you signed up for that card. When it’s time for a debt consolidation loan, you can choose whichever loan makes the most sense for you.
When to Consolidate Your Debt
If you’ve been thinking about debt consolidation, it might be time to try to get a loan to pay it off. How can you tell if it’s a good idea? When is the right time to consolidate debt? The truth is it depends on your unique situation, but here are three good signs that it might be time to consolidate your payments.
You’re Worried About Your Credit Score
Are you worried that your debt will decrease your good credit score? This may be one of the biggest reasons people choose to consolidate their debt. It can help you increase your credit score in the long term by reducing your total debt and eliminating risk.
Your Debt Has High Interest
If you’re currently paying off several high-interest loans, it might be time to try to consolidate to one loan with a better rate. It will allow you to pay less in the long run, and it might help you save money.
You Need a Repayment Plan
One of the drawbacks of credit cards or other options to repay debt is that there is no repayment plan. You can keep using your card and pay back the minimum every month. However, this keeps you in debt forever. A loan will allow you to have a fixed rate to pay every month and help you get out of debt altogether.
How To Consolidate Debt
If you have large loans and owe multiple companies with bills that have not yet made it to collections, find a loan that would cover the cost of all those other loans. Use that new loan to pay off the other loans – and then slowly pay off the new loan.
You will want to compare interest rates, amounts, and what you can afford each month. This loan will help you pay it all off and owe one company while only paying one monthly payment.
Choose between online lenders, bank loans, and credit unions. Consider finding a lender that will offer direct payment to creditors. This will help you keep things organized and understand what the loan is going towards.
Once you have picked the right loan for your situation, you will need to apply for the loan. You might need to fill out an application and wait for a response.
If a lender pays the creditors directly, you will want to double-check that you owe zero on the original loan. After this step is complete, you can start making payments on your new loan. If the lender does not pay your creditors directly, be sure to pay off those other loans right away so that you don’t spend your loan money and end up in a deeper debt situation than the one you were in before!
Is Debt Consolidation Right For You?
Debt consolidation may not be right for everyone, and we always recommend seeking out professional help if you aren’t sure. However, if you have more than a handful of loans that all need to be repaid and are costing you lots of money in interest, it may be time to consider a debt consolidation loan.
About the Author
Kayla is a full-time content creator, and her passion is focusing on sustainability and budgeting. When she's not writing finance content, her focus is on the environment and sustainability. Kayla loves to travel and is always looking forward to her next vacation, where she can learn finance tips from around the world and how to help create more sustainable business practices.