Trying debt consolidation with a debt consolidation loan or a balance transfer using a credit card may not always result in eliminating your debts. What it can do is help make it easier and could make it less expensive to repay your debts.
If you can lock in a lower interest rate than the rates you pay on your current debts, you could save hundreds or even thousands of dollars depending on the rates and the size of the debts. Merging your debts may also make it more manageable to repay what you owe and avoid late payments, which can take a toll on your credit score and end up costing you late payment fees, too.
What is Debt Consolidation?
Debt consolidation is when you roll multiple debts into a single debt. Instead of making separate payments to multiple creditors or lenders each month, you’ll merge them and end up making one payment to a single lender, ideally at a lower interest rate than the rates you were paying the other lenders. You can use debt consolidation to combine several types of debt, including credit card balances, car loans, medical debt, personal loans, and student loans.
Debt Consolidation Methods
Two of the most popular methods to consolidate debt are the debt consolidation loan and using balance transfer offers associated with a credit card.
Debt consolidation loan: This is a personal loan that ideally lets you consolidate loan balances with multiple lenders resulting in one, fixed monthly payment. While the details of this type of loan can vary from lender to lender, most have terms ranging from one to 10 years. Some lenders directly repay your creditors for you, while others disburse funds to you and let you repay the other lenders.
Credit card balance transfer offers: A balance transfer offer may help you pay down your debt and reduce the amount of interest you pay. Like a debt consolidation loan, a balance transfer offer lets you pay off other debts leaving you with one balance on the credit card. Balance transfer offers can be introductory offers for new cardholders or promotional offers for existing cardholders and typically feature a low annual percentage rate (APR) ( and a one-time percentage-based or flat fee transaction fee) but only for a specified, limited time, usually ranging from 12 to 21 months. You may save thousands of dollars in interest if you pay off the balance before the introductory or promotional period ends. A word of caution: when the introductory or promotional period ends the unpaid balance becomes subject to the higher APR disclosed in your card account terms and conditions.
Why Consolidate Debt?
There are several benefits if you choose debt consolidation, including:
1. A Single, Monthly Payment
Debt consolidation makes it easier to repay your debt. Instead of having to make multiple monthly payments to different creditors or lenders, you’ll only have to make one monthly payment. This could leave you feeling like some weight has been lifted off your shoulders and being more motivated to continue your debt payoff journey.
2. Lower Interest Rate
Unsecured debt, especially credit card debt, typically comes with high interest rates that can cost thousands of dollars, depending on the size of the balance you owe. If your credit score has improved and you’re able to lock in a lower-interest rate on a debt consolidation loan or take advantage of a credit card balance transfer offer, such as a 0% APR introductory offer or a similar promotional offer for a card you already have, you may be able to keep more of your hard-earned money.
3. Higher Credit Score
Debt consolidation can also possibly improve your credit score. If you make your payments on time, every time, you may be able to see a nice boost in your credit score. This can help you qualify for loans and credit cards with competitive rates and favorable terms in the future.
The Bottom Line
If you’re ready to get out of overwhelming debt, debt consolidation may be a worthwhile option. Paying down own loan each month instead of paying multiple creditors can help take the stress and confusion out of the process and steer you toward the financial security you deserve.
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