Happy couple who are consolidating debt

What are the benefits of debt consolidation?

Mar 22, 2024
By Mariclare Cranston, Marketing Content Strategist

A debt consolidation loan is one of the most powerful financial tools you have. And if you’re considering one, you’re not alone. In fact, a survey recently found that the most common reason for taking out a personal loan in 2023 was to consolidate debt. Here’s how a debt consolidation loan pays off…literally. 

Interest Rates Are Lower

Understanding Interest Rates

The interest rate is the amount a lender charges you for borrowing money. It’s calculated as a percentage and is added to your monthly payment. The higher your interest rate, the higher your monthly payment will be. That’s why shopping for the best rate is a smart money move.

Credit cards can be interest rate tricksters. They very often come with a low introductory rate to catch your attention. But after that introductory period, the interest rate can soar. Store credit cards are particularly notorious for high rates – some are as much as 30%. And if you’re not paying your balance off in full each month? You’re looking at paying a substantial amount in interest. 

The Advantages of Consolidating Your Debt

Benefits of debt consolidation

How does debt consolidation help with interest rates?

Debt consolidation can be especially helpful if your current debts have high interest rates because debt consolidation loans tend to have lower interest rates. Since you’re paying off the higher-rate debt with the proceeds from your consolidation loan, you’re replacing high-rate debt with lower-rate debt. 

Lower-rate debt means lower monthly payments for you – plus less total interest paid over the life of the loan. For example, if you make minimum payments on a credit card that has a $5,000 balance and 18% interest rate, you’ll pay a whopping $6,900 in interest alone by the time you have the card paid off. But if you consolidate that debt to a 5-year personal loan with 8.99% APR, you’ll only pay $1,226 in interest over the life of the loan.

What is Debt Consolidation? 

Not entirely sure how debt consolidation works? Get the full picture.

Maintaining a good credit score helps ensure that you get a better rate on a debt consolidation loan. That’s why it’s critical to take action before falling behind on payments. Once you start falling behind, your credit score will go down. This not only means you won’t qualify for a good a rate on a debt consolidation loan, but you may not get approved at all. 

Debt Consolidation vs Debt Relief: Which is Better? 

The truth about debt consolidation vs debt relief

Interest Rates Are Fixed

Your loan payment doesn’t go exclusively towards your loan balance. A portion of that payment also goes towards the interest (and that’s why a lower interest rate is better). So, what’s the appeal of a fixed interest rate?

A fixed interest rate doesn’t change. And that means that your monthly payment stays the same every single month, barring any late fees if you don’t pay on time. And almost any personal loan will have a fixed interest rate. Credit cards typically have a variable rate – meaning both the rate and how much you have to pay can change month to month.

When you’re paying a different amount each time, it can be hard to plan your finances. An unexpected jump in how much you owe could mean you have less to put towards other expenses. The fixed interest rate – and fixed monthly payment – of a debt consolidation loan make it easier to plan your budget and avoid a surprise higher payment. 

Payments Are Simplified

How are you keeping track of your different card and loan payments? A calendar? Spreadsheet? Autopay? Sheer luck?

Managing multiple payments every month gets complicated – especially if you’re trying to time those payments with your paycheck. But when you consolidate your debt, you’re paying off the other obligations, like credit cards, using the proceeds from your debt consolidation loan. You are literally consolidating multiple monthly payments into a single payment.

The advantages of a simple, single payment don’t stop there. Knowing exactly when that money will leave your account each month – and exactly how much money the payment will be – means you can manage your cash flow better. It also reduces the likelihood of forgetting a payment, saving you on late fees and potential dings to your credit score. 

Estimate Your Debt Consolidation Loan Payment

Repayment Has an End Date

Do you have any idea when your credit cards will be paid off? Probably not. Credit cards are revolving credit, meaning as you pay it down, the credit becomes available again. And, because interest rates are often variable, it can be hard to tell when you will get that balance down to $0. Minimum payments are another complicating factor. The majority of your minimum payment covers the interest.

Do this when money’s tight

It's critical to do this the minute you feel financially behind

A debt consolidation loan, though, has a specific term. The term is how long the repayment period lasts, so a loan with a 5-year term will be paid off in 5 years. The date is so exact you can mark your calendar. This level of clarity about your payments makes budgeting easier. And that payoff date that seemed so illusive before suddenly feels totally doable. 

How Do I Get a Debt Consolidation Loan

The most important thing to do before applying for a debt consolidation loan? Don’t wait. Waiting until you’re behind on bills could potentially lower your credit score. And that could impact your ability to get approved. The minute you feel like money is getting stretched too thin – especially because you’re paying multiple credit cards – you should talk to your financial institution about debt consolidation.

When you’re ready to apply, it’s as simple as:

  1. Shop for a loan that has no application or origination fees as well as a competitive interest rate. Ensure they have a good level of customer service, too, for when questions arise.
  2. Gather all your debt information. You’ll need the account numbers and balance to be paid off for all credit cards you’re consolidating. 
  3. Apply. The lender will likely ask for identification and proof of income, and potentially additional details.

Once you’re approved and pay off your cards, continue to monitor them. Often, there is accrued interest that may not appear until the next bill. You don’t want to miss that and end up paying a late fee.

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