How does debt consolidation help you pay off your debt faster?
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Having multiple sources of debt can seem overwhelming. Debt consolidation can help simplify the repayment process, reduce total interest costs, and get you out of debt faster.
Read on to learn how debt consolidation works, and its pros and cons.
How does debt consolidation work?
Debt consolidation involves taking out a new personal loan to replace several high-interest debts, such as credit card. Debt consolidation loans are installment loans, so you’ll receive a lump sum up front and then make fixed monthly payments for the life of the loan.
When you consolidate your debt, you can streamline paying off your debt because you’ll have just one loan to focus on and one due date to track. Ideally, your debt consolidation loan will have a lower interest rate than you are paying on your existing debts. That way, you’ll spend less money on interest charges — meaning your monthly payments will be lower — and you’ll be able to repay the debt earlier.
If you’re looking for a personal loan to consolidate your debt, visit Credible for view your prequalified personal loan rates from various lenders.
Advantages of debt consolidation
Why bother with debt consolidation instead of just focusing on your current debt repayments? Here is an overview of some of the benefits of debt consolidation:
- Might get a lower interest rate — When looking for a debt consolidation loan, try to find a lender who will offer you a lower interest rate than what you are currently paying on your debt. This way you can spend less money on interest and pay off your debt sooner. For example, credit card interest rates are typically much higher than personal loan rates, so consolidating multiple credit card balances into one personal loan could yield significant savings.
- Lower monthly payments — If you get a lower interest rate, your monthly payment amount will likely be lower. This can leave room in your budget to make additional debt payments.
- Simplified reimbursement process — Instead of having to track your progress on multiple debts, once you consolidate your debt you will only have one loan repayment to make each month with a single lender.
Disadvantages of debt consolidation
Debt consolidation also has some disadvantages to consider before deciding if it’s the right decision for you:
- May not qualify — If your credit score has dropped since you incurred your original debts or your debt-to-equity ratio is too high, you may not qualify for a new debt consolidation loan. But adding a co-signer with good credit can increase your chances of approval.
- A lower interest rate is not a guarantee — While debt consolidation streamlines the debt repayment process, there is no guarantee that you will be offered a lower interest rate. If you don’t have good credit, you may even be offered a higher interest rate, which could make paying off the debt more expensive and more difficult.
- May temporarily affect your credit score — When you apply for new credit products, like a debt consolidation loan, you’ll end up with a serious investigation into your credit report. This can temporarily lower your credit score by a few points. Opening a new credit account can also reduce the average age of your account, which can also negatively affect your score. But keep in mind that this drop is temporary, and paying off your new loan on time can help improve your credit over time.
How Does Debt Consolidation Help You Achieve Your Earning Goals?
The main benefit of debt consolidation occurs when you qualify for a lower interest rate than what you are currently paying. The less interest you pay, the more money you can spend to pay off your principal balance. If you can pay off your loan balance sooner than expected, you can save even more on interest. A lower interest rate saves you money, but making extra payments to pay off your debt sooner will help you save even more.
It is also possible to choose a shorter loan term when you consolidate your debts. This may result in higher monthly payments, but you’ll likely receive a lower interest rate and pay off your debt faster.
Debt consolidation also simplifies the repayment process. Having multiple sources of debt with different lenders, due dates, and interest rates can be a bit overwhelming. By having just one loan to focus on repayment, you may find it easier to establish a clear debt repayment plan and focus on making progress toward paying off your debt.
If you are ready to apply for a debt consolidation loan, Credible allows you to compare personal loan rates to find the one that best suits your needs.