5 reasons to get a debt consolidation loan
If you’re looking for something to help you pay off your debts, a debt consolidation loan could be the answer.
Anyone who has been in debt knows how difficult it can be. You have extra bills to pay each month and interest charges keep increasing the amount you owe.
A debt consolidation loan is made for this situation. After getting one, you use the loan money to pay off your debts. Going forward, you will only have to repay the debt consolidation loan.
Not everyone who is in debt needs this type of loan. If you can realistically pay it all back in a few months, it probably doesn’t make sense to go through the loan process. But if any of the following apply to you, then a debt consolidation loan may be worth your while.
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 to which you are entitled depends on your credit score.
Since high-interest debt costs you the most, you should consolidate it whenever 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 debt-related situations is when you can’t make all of your monthly payments. Perhaps you have reviewed your budget several times and cut costs where you could, but that is not enough. Missing payments make matters even worse, as you could then be charged a fee.
Debt consolidation might be your best option here. When you apply for a loan, you have some control over the monthly payment amount. If you need a lower monthly payment, you can opt for a longer loan. Lenders typically offer personal loans with terms ranging from one to five years. The longer your loan term, the more interest you pay, but it may be worth it if it makes your payments affordable.
3. You want 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 point of view, debt consolidation is a better option. You only need to remember a payment amount and a due date. This is a nice advantage if you used to make payments on several debts each month.
4. You want a set time frame to pay off your debt
One of the reasons credit card debt can be so difficult to pay off is that it’s open-ended. 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 pay off your debt.
The flexibility offered by credit cards can be helpful. 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 score
It may sound surprising, but a debt consolidation loan can boost your credit score if you use it for credit card debt.
There are a few reasons for this. The first is a factor called your credit utilization rate, which is one of the most important components of your credit score. It measures your credit card balance against your credit limits, and the lower the better. The rule of thumb is to aim for less than 30% credit utilization at all times.
Although 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 translate into a solid boost in your credit score.
Another part of your credit score is your credit mix or the types of credit accounts you have open. It’s better for your score if you have credit card and loan accounts instead of just one. 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 one monthly payment, or boost your credit score. And if you’re working through credit card debt, a debt consolidation loan will be like a payment plan you can follow to free yourself from debt.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.