Anyone who’s been in debt knows how difficult it can be. You have additional bills to pay each month, and interest charges keep adding to the amount you owe.
A debt consolidation loan is made for this situation. After you get one, you use the loan money to pay off your debts. In the future, you only have to pay off the debt consolidation loan.
Not everyone who is in debt needs this type of loan. If you can realistically pay it off in a few months, then it probably doesn’t make sense to go through the loan process. But if any of the following situations apply to you, then a debt consolidation loan may be worth it.
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1. You have high interest debt
The best debt consolidation loans offer reasonable interest rates. If you can get a loan with a lower interest rate than the rest of your debt, consolidating your debt will save you money. Note that the interest rate you qualify for depends on your credit score.
Since high interest debt costs you the most, you should consolidate it as much as possible. In particular, many consumers use a loan to pay off their credit card debt because most credit cards have high interest rates.
2. Your monthly payments are too expensive
One of the most stressful situations with debt is when you can’t make all of your monthly payments. You may have revised your budget several times and cut costs where you can, but that’s not enough. Missing payments make matters worse as you may be charged a fee.
Debt consolidation might be your best option here. When you apply for a loan, you have some control over the amount of the monthly payment. If you need a lower monthly payment, you can opt for a longer loan. Lenders typically offer personal loans with terms of one to five years. The longer your loan lasts, the more interest you pay overall, but it can be worth it if it makes your payments affordable.
3. You wish to have a single monthly payment
Even if you can afford all the monthly payments, having multiple debts is difficult to manage. You need to keep track of the due dates for each payment, and if you miss any it could cost you late fees.
From a practical standpoint, debt consolidation is a better option. Just remember a payment amount and a due date. This is a great advantage if you used to pay off several debts each month.
4. You want a set time frame to pay off your debt
One of the reasons that credit card debt can be so difficult to pay off is that it is unlimited. If you have $ 5,000 in credit card debt, you could pay it off in two, five, or even 15 years. There is no time limit required. All you have to do is make the small minimum payments. If you haven’t reached your credit limit yet, you can also continue to use your cards and increase your debt.
Let’s say instead, you get a $ 5,000 debt consolidation loan with a term of four years. You now have a fixed payment amount and a deadline to repay your debt.
The flexibility offered by credit cards can help. But some people find it easier to pay off debt with the structure offered by a loan.
5. You would like to improve your credit rating
It may sound surprising, but a debt consolidation loan can increase your credit score if you use it for credit card debt.
There are a few reasons for this. The first is a factor called the credit utilization rate, which is one of the most important parts of your credit score. It measures your credit card balances against your credit limits, and the lower it is, the better. The rule of thumb is to aim for less than 30% credit usage at all times.
While loan balances can also affect your credit score, they have a much smaller impact. So, if you pay off your credit cards with a debt consolidation loan, it reduces your use of credit. This could give your credit score a boost.
Another part of your credit score is your credit composition or the types of credit accounts you have opened. It’s better for your score if you have credit card and loan accounts instead of just one of the two. If you only have credit cards, getting a debt consolidation loan will improve your credit mix.
In the right situation, a debt consolidation loan can be of great help. You can use one to save money, reduce to a single monthly payment, or increase your credit score. And if you are working on credit card debt, a debt consolidation loan will be like a payment plan that you can follow to get rid of your debt.