Debt consolidation means combining all your debts into one easy-to-manage amount. This process means applying for a consolidation loan, which you will then use to turn several payments into one – often with a lower interest rate and new terms of agreement. If you’re having trouble making ends meet every month and you’re looking for solutions on how to get out of debt fast, a debt consolidation loan can work for you. This will however require discipline and commitment to make the process work for you.
This combines your multiple debts into a single, larger loan, you may also be able to obtain more favorable payoff terms, such as a lower interest rate, lower monthly payments, or both. Here’s how to decide whether you should consolidate your debts and how to go about it if you do.
- Debt consolidation is the act of taking out a single loan or credit card to pay off multiple debts.
- The benefits of debt consolidation include a potentially lower interest rate and lower monthly payments.
- You can consolidate your debts using a personal loan, home equity loan, or balance-transfer credit card.
There are many benefits to applying for a debt consolidation loan. It’s the smart move when it comes to paying off multiple debts and you can save some money too. But there’s more…
- You save on interest: If you have multiple debts, each debt comes with its interest rate, adding considerably to the amount you have to pay each month. However, because a consolidation loan combines all your debts into a single payment, you will only have one fixed interest rate to concern yourself with.
- Pay a lower installment each month: Living to pay off debt is no way to live. A debt consolidation loan can help you keep up your credit payments and still have enough money left over for living expenses. For example, if you had five debts you were paying to different creditors, a consolidation loan will combine all those debts so that you only pay a single creditor. That means more money left over each month to start building up a savings buffer that will keep you from falling into bad debt in the future.
- Improves your credit score: If you’re struggling to keep up with your debt repayments each month, maybe missing the odd payment here and there, your credit score will suffer. By combining all your debts into a single, lower, monthly installment, it will be easier to make sure that your accounts are paid up each month, thus keeping your credit score healthy.
How Debt Consolidation Loans Work
You can roll old debt into new debt in several different ways, such as by taking out a new personal loan, a new credit card with a high enough credit limit, or a home equity loan. Then, you pay off your smaller loans with the new one. If you are using a new credit card to consolidate other credit card debt, for example, you can transfer the balances on your old cards to your new one. Some balance transfer credit cards even offer incentives, such as a 0% interest rate on your balance for some time.
In addition to the possibility of lower interest rates and smaller monthly payments, debt consolidation can be a way to simplify your financial life, with fewer bills to pay each month and fewer due dates to worry about.