It’s all too easy to get into debt, but getting out of it can feel like an insurmountable mountain. One of the best ways to fix the situation is to consolidate your debt into one personal loan. Usually, this should give you lower interest rates, allowing you to pay your debt faster and save money over time.
On top of that, there are manageable debt consolidation loans that will give you better repayment terms, allowing you to recover your peace of mind. But what exactly is debt consolidation, and how do you know if it’s right for you?
What Is Debt Consolidation?
Debt consolidation rolls multiple loans into a single, easily payable loan. If you have multiple loans, you can apply for a personal loan from a credit company and pay off your credit cards. This makes it easier to regain control over your finances, especially if you’re overwhelmed.
How Does Debt Consolidation Work?
Debt consolidation allows you to borrow an amount equal to your outstanding loans. The money is deposited directly to the lenders or into your bank account, and you then can pay off all your credit card debt. This leaves you with one lender you can pay monthly over an agreed period.
If you want to keep your monthly payments low, you can opt for a longer repayment term. However, this will result in you paying more interest over time.
Why Consider Debt Consolidation?
Simplified Finances
Tired of tracking all your loan repayment deadlines? Debt consolidation allows you to avoid tracking multiple repayment plans, leaving you with only one to focus on. You no longer have to worry about multiple due dates each month, reducing the chance of missing a payment.
Also, unlike credit cards with fluctuating interest rates, personal loans come with a fixed interest rate. This makes it easier to budget your repayments and know exactly how much is due each month.
Pay Down Debt Faster
One of the most significant advantages of debt consolidation is lower interest rates. This reduces the amount you need to pay, allowing you to pay off your debt over a shorter period.
Could Save Money
You can reduce your monthly payments by consolidating high-interest debts into a personal loan with a lower interest rate. This will save you money, which you can use to grow your emergency fund.
For example, if you have $5,000 credit card debt with a 21% APR and say you pay it off in 2 years, it would cost you around $1,166.28 in interest. On the other hand, if you took a personal loan with a 10% APR, you would pay $537.39 in interest. This allows you to save around $629.
Flexible Repayment Plan
Most personal loan providers offer flexible loan terms so you can pick one that best fits your financial situation. As an added advantage, this lets you know when you’ll be debt-free, which isn’t usually the case with credit card loans.
Is Debt Consolidation Right for You?
If your new loan’s interest rate is lower than your current debts, consolidating could help you save money. It could also come in handy if you’re struggling to manage multiple bills or keep your due dates straight.
However, consolidation might not provide much benefit if your debt is minimal or you’re already close to paying off your debts.
While debt consolidation can put you on the right path toward getting rid of debt, it’s not an easy or fast fix. Unless you reign in bad spending habits and continue to reduce your debt load, you could continue to rack up more debt and derail your financial goals.
You should also evaluate your options carefully when taking a debt consolidation loan. If you leave with the first loan offer, you could leave money on the table through a high APR. Otherwise, if it’s suitable for your financial situation and you pick the right lender, it will help you gain control over your debts and finances.
