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If you have a lot of debt, there’s a good chance that you’ve heard of debt consolidation. But what, exactly, is it?
The main idea behind debt consolidation is that you take several small loans and get them into one place. One way to do this is by taking out a new loan and using it to pay off your smaller debts or highest-interest debts. There are also other methods, such as using balance transfers or working with a debt consolidation company.
In the end, though, the idea is the same. You get multiple debts under one umbrella and reap the benefits.
5 benefits in consolidating your debt
In general, debt consolidation offers you a number of benefits, whether you’re paying off credit card debt, or have other unsecured loans with high interest rates. Here are five ways you can benefit from consolidating your debt.
1. Save money with a lower interest rate
In many cases, debt consolidation allows you to save money on interest rates. If you have several high-rate loans, paying them off with a single loan with a lower rate could potentially save you thousands of dollars.
If you use a debt consolidation company, they might be able to help you negotiate lower interest rates so you pay less in finance charges.
2. Pay off the debt faster
Getting everything in one place allows you to focus on getting rid of the debt. Plus, when you have a lower rate, more of each payment goes toward reducing your principal. That accelerates the rate at which you pay down your debt, so you could be debt free years sooner.
It’s also a nice touch that, with debt consolidation, you know when you’ll be finished. Many debt consolidation loans can have you on track to pay off debt in three to seven years, depending on how much debt you have and how much you can pay each month.
3. Get everything in one place
When you have multiple debts, it can be difficult to keep track of everything. In fact, you might miss a bill here and there. However, with everything under one roof, there’s a greater chance that you’ll be more organized.
Plus, you won’t be making payments to several creditors, with most of each payment going toward interest. Now that everything’s in one place, payments can be more focused. With only one payment to make, instead of several, you can be more effective as you pay down debt.
4. Potential to improve your credit score
Depending on the type of debt consolidation, you might actually see an improvement in your credit score when you go through the process. If you can get an unsecured personal loan to consolidate your debt, you immediately free up credit card balances, boosting the credit utilization portion of your score. Plus, as you make on-time payments on your debt, you’ll start to see an improvement in your score.
The main thing you need to be aware of is that you could wind up in even more debt if you aren’t careful. If you pay off credit cards using debt consolidation, make sure you avoid running up new balances. Keep them open, for the credit score benefit, but be careful not to overspend.
5. Peace of mind
Once you’ve consolidated your debt, there’s a chance that you’ll see increased peace of mind. Often, with debt consolidation, you have a timetable for becoming debt free. You know that you’ll only be in debt for a finite amount of time, and you can feel relief that you’ve taken a substantial step toward improving your overall finances.
Reducing debt-related stress can also have benefits in your personal life. You’re more likely to have better relationships, and maybe even see an improvement in your health and wellness.
A step-by-step guide to consolidating your debt
If you decide that getting a personal loan to consolidate debt is the right move for you, here are the steps you should take:
- Gather your loan information: Collect the loan information for the debts you want to consolidate. Identify the high-rate credit cards and other debts that you hope to pay off using the personal loan.
- Check your credit score: Knowing your credit score ahead of time will help you better understand the lenders and terms you may qualify for.
- Research lenders: Once you have an idea of what your score is, research different lenders. There is plenty of information online where you can find reviews and figure out which is the best personal loan for your situation.
- Get preapproved: Many lenders will use a soft pull to determine what offers you qualify for. Find out if you can get a loan, and get rate quotes from different lenders to see which preapproval works best for you.
- Provide loan information to the new lender: In many cases, if you’re getting a debt consolidation loan, the lender will expect you to send the account information after your official approval. Then, they will pay off your loans directly.
- Pay off your smaller or higher-interest debts: In other cases, you might just be given a lump sum, and you can use the funds to take care of your debts. Most personal lenders can get money into your account fairly quickly. As soon as you see it, pay off your debts with the highest interest rates or smallest balances.
After you consolidate your debt
Once you complete your debt consolidation, it’s vital that you don’t let your debt amount creep up on you. Look at the underlying reasons that you found yourself in debt in the first place, and address those issues. One of the biggest dangers of debt consolidation is that you free up credit cards and then spend to the point where you have new debt on top of the freshly-consolidated debt.
Debt consolidation can be a great tool to help you get back on top of your finances and move forward. You can reduce how much you pay, get rid of it faster, and enjoy the peace of mind that comes with knowing your debt has a defined expiration date.