What is debt consolidation?
Debt consolidation is the process of paying off multiple debts with a new loan or balance transfer credit card, usually at a lower interest rate. This can help you lower your monthly payment commitment and help with managing your cash flow better.
Having various different financing balances to be paid off at different times, for different amounts and to different parties can be stressful. Debt consolidation means you only need a single financing to pay everything once and for all.
The process of consolidating debt with a personal loan involves using the proceeds to pay off each individual loan. While some lenders offer specialized debt consolidation loans, you can use most standard personal loans for debt consolidation.
Why should I apply for debt consolidation?
Consolidating your debt can have a number of advantages, including faster, more streamlined payoff and lower interest payments.
Here are some benefits of debt consolidation:
1. Streamlines finances
Combining multiple outstanding debts into a single loan reduces the number of payments and interest rates you have to keep track of. Consolidation can also improve your credit health and score by lowering the chances of you making a late payment or missing a payment entirely.
2. May help you pay off debt earlier
If your debt consolidation loan is accruing less interest than the individual loans would, consider making extra payments with the money you save each month. This can help you pay off the debt earlier, meaning you save even more on interest in the long run.
3. Lower interest rate
If your credit score has improved since applying for other loans, you may be able to decrease your overall interest rate by consolidating debts, even if you have mostly low-interest loans. Doing so can save you money over the life of the loan, especially if you don’t consolidate with a long loan term.
4. May reduce monthly repayment amount
When consolidating debt, your overall monthly payment may decrease because upcoming payments are spread out over a new (and perhaps extended) loan term.
5. Possibility of improved credit score
Applying for a new loan may temporarily lower your credit score because of the hard credit inquiry. However, debt consolidation can also improve your score in various ways. For instance, paying off revolving lines of credit like credit cards can reduce the credit utilization rate reflected in your credit report.