Imagine this — you take out a personal loan to pay down your credit card debt. Now you only have one monthly payment instead of juggling multiple payment dates and creditors each month. And, if your loan is approved for a lower interest rate than your current debt, you could save money on interest over time.
That’s the short version of how debt consolidation loans work. For more details, let’s see how your situation could relate.
Pay off multiple debts with one new loan
Have you ever played the game “Whack-a-Mole”? That’s what paying several debt payments each month can feel like. Your payment dates may not be random like the moles in the game, but it can still feel impossible to keep up with them all.
When you consolidate your debt, you can wipe out several debts with one new loan.
Let’s say you have three credit cards and two medical bills totaling $12,000 in debt. By taking out a debt consolidation loan for $12,000, you can pay off those five bills and only have one new loan, payment date and creditor to work with. Or, if you’re playing the game, only one mole to whack each month.
For more information, check out how to pay off several bills with debt consolidation.
Debt consolidation options
There are several ways to consolidate debt, including personal loans, home equity loans and credit card balance transfers. Here’s a chart to help you compare some potential positives and negatives of each option:
|Debt Consolidation Type||Positives||Negatives|
|Personal loan||Fixed interest rate; fixed monthly payment; potential to earn rewards||Could have origination fees (State based); longer term to repay debt|
|Home equity loan||Fixed interest rate; long repayment terms; interest paid could be tax deductible||Reduction in equity; closing costs and fees; risk of foreclosure if you default on loan|
|Credit card balance transfer||Low interest rate; access to perks and rewards; save money on interest||Introductory rates could end after 6-18 months; balance transfer fees; risk of spending more and adding to debt|
How to know if debt consolidation is good for you
The phrase “personal finance” makes sense because everyone’s situation is different. If you’re considering debt consolidation, ask yourself these things:
- Am I having a hard time paying all my debts on time?
- Am I forgetting payments because I have so many?
- Does most of my monthly payment go toward interest and not my principal balance?
If you answered yes to any of those questions, a debt consolidation loan may be a good solution.
Also, before you consolidate your debt with a loan, be sure you’re committed to your goal. It might be tempting to see your paid-off or lower credit card balances as freed-up credit to use. Since you only transferred your old debt to the debt consolidation loan, using any of this credit will put you deeper in debt. Make a budget, stick to it and avoid using open credit until the debt consolidation loan is paid in full.
Make it work for you
The basics of debt consolidation are pretty simple — use a single loan to pay off multiple debts. However, taking out a debt consolidation loan is a big decision that can impact your personal finances for years. If you pay off the loan on time and stick to your overall plan, you can see how this debt relief tool can work in your favor.