Credit cards, medical bills, student loans, personal loans. Each account has a different due date and a different interest rate. It’s enough to make your head spin. And it can be hard to keep up! It can also make the idea of getting out of debt feel overwhelming. If any of this sounds familiar, a debt consolidation loan can help you manage, reduce, and — with some new financial habits — even get out of debt for good.
What is a debt consolidation loan?
A debt consolidation loan allows you to take multiple debts and combine them into one loan with a single monthly payment. Without multiple payments to juggle, you may find it easier to manage your bills each month since you’ll only have one payment amount and one due date.
These loans are typically unsecured, which means they don’t require collateral, such as a car, in order for a borrower to qualify. In some instances, however, collateral is needed for qualification or a lower interest rate. Before you refinance your other debts with a new loan to reduce your total monthly debt payment, you should consider that the new loan may increase both the total number of monthly payments and the total amount paid over the term of the loan.
Signs that you may benefit from a debt consolidation loan
A debt consolidation loan can be a great way to get a better handle on your personal finances and start getting out of debt. This kind of loan might be a good fit if you:
- Have a hard time making monthly payments on time.
- Are unable to pay balances down quickly, as the majority of your payments go towards interest, not principal.
- Feel overwhelmed by debt and aren't sure how to get out of it.
After debt consolidation: do’s and don’ts
Once you consolidate your debt and start making payments, it's important to avoid potential pitfalls, including accepting new credit card offers once your debt is consolidated.
Many consumers see these new credit cards, as well as cards they just paid off, as "new" money they can access. As a result, they may end up in even more debt.
Before consolidating your debt, be ready to break old habits that may have gotten you into trouble the first place, including overspending.
Ready for a fresh start?
A debt consolidation loan is a great way to give your finances a fresh start. Take time to strategize so you can reduce spending and get out of debt for good.
*This article has been updated from its original posting on April 14th, 2015.
Miranda Marquit contributed to this article.
