Debt consolidation is the method of paying off several debts through a new loan or balance transfer credit card — usually at a lower rate of interest. It can be challenging to keep track of payments and balances on outstanding debts on credit cards, student loans, and auto loans. Consolidating these debts into one loan may streamline your finances, but the process possibly won't fix existing financial issues.
Debt consolidation is typically a good way for borrowers with multiple high-interest loans. But it may only be done if your credit score has become better since the time you applied for the original loans. If your credit score doesn't meet the eligibility for a lower interest rate, debt consolidation may not make sense. Consolidating your debt can have many benefits, including lower interest payments and a faster, more streamlined payoff.
1. Streamlining Finances
Merging several outstanding debts into one single loan lessens the number of payments and interest rates worth stressing about. Consolidation can also better your credit by lessening the opportunities of paying late or missing a payment entirely. And, if you're working to become debt-free, you'll have a clearer picture of when you'll be able to pay all your debt.
2. May Expedite Payoff
Suppose your debt consolidation loan is accumulating not as much interest as the individual loans; consider making additional payments with the money saved every month. This will allow you to pay the debt in advance, thereby helping you save even more on interest in the future. Remember, however, that debt consolidation usually results in extended loan terms.
3. Could Reduce Interest Rate
If you've improved your credit score since applying for other loans, you may be able to reduce your overall interest rate via debt consolidation — even if you've got a major chunk of low-interest loans. This method can be money-saving over the life of the loan. To find the most competitive rate that exists, look around and concentrate on lenders that provide a personal loan prequalification process.
4. May Reduce Monthly Payment
When consolidating debt, your overall monthly payment will likely decrease since future payments are spread out over a possibly extended and new loan term. While this can be beneficial from a budgeting viewpoint on a monthly basis, it implies that you would shell out more over the loan's term, despite a lower rate of interest.
5. Credit Score Improvement
When you apply for a new loan, your credit score may dip temporarily, but debt consolidation can also better your score in various ways. For instance, making payments toward revolving lines of credit can reduce the credit utilization rate your credit report reflects.
