5 Reasons to Get a Debt Consolidation Loan
If you're looking for something to help you pay off debt, a debt consolidation loan could be the solution.
Anyone who has been in debt knows how difficult it can be. You have extra bills to pay every month, and interest charges keep adding to how much 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 only have the debt consolidation loan to pay back.
Not everyone who has debt needs this type of loan. If you can realistically pay off everything in a few months, then 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 worthwhile.
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, then 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 money, you should consolidate it whenever possible. In particular, many consumers use a loan to pay off credit card debt, as 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 your monthly payments. Maybe you've reviewed your budget multiple times and cut costs where you can, but it's not enough. Missing payments makes things even worse, because then you could be charged fees.
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 from one to five years. You do pay more interest overall the longer your loan lasts, but this can be worthwhile if it makes your payments affordable.
3. You want to have a single monthly payment
Even if you can afford all the monthly payments, having multiple debts is hard to manage. You need to keep track of the due dates for every payment, and if you miss any, it could cost you a late fee.
From a convenience standpoint, debt consolidation is a better option. You only need to remember one payment amount and due date. That's a nice perk if you used to make payments on several debts every month.
4. You want a set time frame to pay off your debt
One reason credit card debt can be so hard to pay off is because of how open-ended it is. If you have $5,000 in credit card debt, you could pay that off in two, five, or even 15 years. There's no required time frame. All you need to do is make the small minimum payments. If you haven't hit your credit limit yet, you can also keep using your cards and adding to your debt.
Let's say that instead, you get a debt consolidation loan for $5,000 with a four-year term. Now you have a fixed payment amount and a time frame to pay off your debt.
The flexibility that credit cards offer can be useful. But some people find that it's easier to pay off debt with the structure that a loan offers.
5. You'd like to improve your credit score
It might seem surprising, but a debt consolidation loan can increase your credit score if you use it for credit card debt.
There are a couple reasons for this. The first is a factor called your credit utilization ratio, which is one of the most important parts of your credit score. It measures your credit card balances compared to your credit limits, and the lower it is, the better. The rule of thumb is to aim for a credit utilization that's below 30% 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 lowers your credit utilization. This could result in a solid boost to 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 of the two. If you only have credit cards, then getting a debt consolidation loan will improve your credit mix.
In the right situation, a debt consolidation loan can be a big help. You could use one to save money, cut down to one monthly payment, or boost your credit score. And if you're working on credit card debt, a debt consolidation loan will be like a payment plan you can follow to become debt free.
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