Do you have multiple types of debt, like credit cards, personal loans, and medical bills? If so, a debt consolidation loan can come in handy. It can help you roll all your monthly payments into one monthly loan payment.
Whether you consolidate debt through a personal loan, credit card, home equity line of credit (HELOC), or another method, you may enjoy various benefits. Here are some reasons why debt consolidation can be a great way to eliminate debt.
1. Interest Savings
If you have a lot of high-interest debt, there’s a good chance you’re spending too much on interest. By consolidating your debts, you may be able to save on interest and keep hundreds or even thousands of your hard-earned money.
This might be the case if you can land a personal loan with a lower interest rate than the rates you currently have, or get approved for a credit card with a 0% APR intro balance transfer offer. While there’s no guarantee you’ll be able to lock in a lower interest rate, this is more likely to happen if your credit score and finances have improved since you initially took out your debts.
2. One Monthly Payment
Let’s be honest. You lead a busy life and don’t want to keep track of multiple monthly payments and interest rates. That’s where debt consolidation comes in. It lets you roll several debts into a single payment with a fixed interest rate that will remain the same over the life of the loan or the introductory period if you opt for a credit card with a balance transfer offer. You’ll have a clear path to being debt-free and will be more likely to meet your goal.
3. Credit Improvement
It’s true that applying for a new type of credit, like a personal loan, often involves a hard credit inquiry, which can temporarily lower your credit score by a few points. A hard inquiry stays on your credit report for two years. But if you make your monthly payments on time, every time, and pay attention to the other factors that go into calculating your credit score, you’ll find that your credit will slowly but surely improve.
Having strong credit is important as it opens the doors to more financing options with lower rates and more favorable terms. Just remember that if you miss a payment or make it late, your credit score could take a hit.
4. Savings on Late Fees
Most credit card companies and lenders charge late fees to borrowers who miss their payment deadlines. Late fees are currently a flat rate or a percentage of your total account balance although there will be an $8 cap for credit card late fees soon. Regardless, they can add up quickly.
If you consolidate your debt, you’ll only have one payment with one due date. This means your chances of paying late are slim, especially if you enroll in automatic payments.
5. Different Options Available to Consolidate Debt
There are multiple ways to consolidate debt so you can choose the ideal option for your unique lifestyle and financial situation. Here are a few of the most common debt consolidation methods you may want to consider.
Debt consolidation loan
A debt consolidation loan is a personal loan designed to pay off debts. It usually comes with a fixed interest rate and set repayment terms so you can easily plan payments beforehand.
Credit card balance transfer
If you qualify for a credit card with a 0% APR for balance transfers for an introductory period, you can transfer your other existing credit card debt to it, subject to the credit limit you’re assigned by the new card’s issuer. With a 0% APR, you don’t have to pay interest if you repay the balance before the intro period ends, usually for a few months. Keep in mind that balance transfer offers also come with a transaction fee which can be a percentage of the amount of the transferred balances, or a flat fee, whichever is greater. In addition, when the introductory period ends, whatever part of the balance remains unpaid becomes subject to the regular APR which is typically a variable rate and can pretty high.
Home equity loan or HELOC
A home equity loan or home equity line of credit (HELOC) may make sense if you have built up equity in your home. While a home equity loan offers a lump sum of money upfront, a HELOC is a revolving line of credit that allows you to access cash when you need it. These loans generally feature a variable APR, and keep in mind that defaulting on a loan using your home as collateral, puts you in jeopardy of losing the home.
Bottom Line
If you’re ready to say goodbye to your debt, debt consolidation can be the ultimate solution. It’s a great way to streamline your payoff, expedite the process, and potentially save some interest while you’re at it.
