Do you stress each month about all your debt payments? If you have multiple forms of unsecured debt, you might be wondering whether there’s a process to simplify those payments. As it turns out, there is a way: a debt consolidation loan. But what is it exactly? And is it a good idea? Read on to learn about the ins and outs of loan debt consolidation.
What is a Debt Consolidation Loan?
Debt consolidation is the process of taking out one loan to pay off all your other loans. In other words, you consolidate all of your debt by paying off your current loans. That way, you’re left with just one loan and only one payment each month.
This can help streamline the debt payoff process and make it more manageable. In some cases, you may be able to score a lower interest rate than those of your previous loans.
How Can I Consolidate My Debt?
There are several ways to consolidate your debt. First, there are debt consolidation loans that you can take out from places like your bank or through a personal loan company like Lending Tree or Avant.
Another form of debt consolidation is through a balance transfer. A balance transfer involves moving all your credit card balances to one credit card with a lower interest rate — sometimes even zero percent. That way, you can benefit from the lower interest rate and pay more toward the principal balance. There are specific cards that are designed for balance transfers, such as Chase Slate.
Through loan debt consolidation, you are applying for a new loan to cover your previous balances so that, instead of having multiple balances with various interest rates, you’ll have one payment with one interest rate — hopefully a better one.
Should I Consolidate My Debt?
You might be thinking that loan debt consolidation is a great idea and an easy way to pay off debt.
While it can make paying off debt more manageable, there are some things you should consider first.
The most important thing is to address the reason you got into debt. Why? Because, if you continue to handle money the way you always have, you won’t be able to solve your debt problem with another loan. If you don’t address the root problem, you could end up in even more debt with a consolidation loan.
If you’re committed to getting out of debt, research various options for loan debt consolidation. It’s important to look at the interest rates and repayment terms. In some cases, the consolidation loan will lower your monthly payment, but lengthen your repayment term. While that may sound good, it also means that you’ll pay more in interest.
You should also read the fine print and see if there are any fees. If you go the balance-transfer route, there are typically transfer fees of three to five percent of your balance. On top of that, the lower interest rate is valid only for a certain amount of time, so make sure to check how long it lasts.
Also keep in mind that a debt consolidation loan can either help or hurt your credit. If you take out a personal loan and pay off your credit cards, you will improve your credit utilization, which could boost your score.
If you use a balance transfer card and use too much of your new card’s available credit to transfer your other debt, it could hurt your score. Plus, applying for any new loans might result in a slight drop in your score.
If you do pursue loan debt consolidation, make payments on all of your loans until you know that they are officially paid off. Once you get the debt consolidation loan or balance transfer, pay off all of your old remaining debt and get confirmation that your balance is at zero. Then pay down your new debt consolidation loan and get out of debt fast.
Whether or not you should consolidate your debt is a personal decision, and one that you should make with a lot of careful consideration. Weigh the pros, the cons, and most importantly, the costs. In some cases, it could save you money. But if you aren’t careful, it may end up costing you even more.