There’s no shortage of reasons why people get personal loans, but debt consolidation – the process of combining multiple debts into one through a personal loan – continues to top them all.1 But why? The reasons may (or may not!) surprise you.
From saving money to boosting credit, we’ve gathered the top reasons why people consolidate debt.
They want to lower monthly expenses
A major reason people consolidate debt is to save money. You may not realize it, but if you have high-interest credit card debt, you could be shelling out between $1,100 and $1,400 a year in interest alone.2 And, if you’re having trouble paying bills on time, you could also be paying close to $600 per year on additional fees, including late and overdraft fees.3
If you’re approved for a debt consolidation loan with a lower interest rate, you could reduce your monthly payments. (See an estimation of how this works with our debt consolidation calculator.) And, by wrapping up multiple debts – each with its own monthly due date – into a single loan with a single due date, you may be able to eliminate late fees as well.
They want to streamline their finances
Between credit cards, medical bills, student loans and more, your list of monthly due dates can be long – and hard to remember! Even with a carefully mapped out calendar, it can be difficult to keep up, especially if your pay days don’t match up with when your bills are due. You also run the risk of late fees if you’re paying bills late.
One of the benefits of consolidating debt is wrapping up multiple bills in a single debt consolidation loan, with one monthly payment and just one due date that works with your pay schedule. It’s less to remember and can help you avoid pesky late fees that can add up over time.
They feel overwhelmed by debt
Debt can creep up on you, and suddenly you feel like you’re underwater. Or an unexpected event, like an expensive medical procedure, can turn your current financial situation upside down. Despite making monthly payments, sometimes balances – sustained by high interest rates – never seem to go down.
Unlike revolving credit, a debt consolidation loan is an installment loan, which means that, as long as you pay on time, it will steadily go down and be paid off within a set amount of time. (Learn more about the difference between revolving credit and installment credit.) With reduced monthly payments and a final payoff date, many find that a personal loan for debt consolidation can provide much-needed financial and psychological relief.
They’re unable to pay down balances quickly
A big benefit of consolidating debt is the ability to eliminate multiple debts at once. Debts that, if you’re only paying the minimum payment, might take years (and years and years4) to pay off, since the majority of your monthly payments go toward interest, not principal. With a debt consolidation loan, you can pay off multiple high-interest debts, including high-interest credit cards, at once.
They want to improve their credit
A personal loan for debt consolidation might also boost your credit score. Since you’ll be paying off debt on multiple accounts (including sources of revolving credit such as credit cards) and increasing your available credit, you’ll lower your credit utilization ratio, an important factor in determining your credit score. Make monthly payments on your new debt consolidation loan on time, and you’ll raise it some more.
They want a fresh start
Last, but certainly not least, many people who consolidate their debt simply want a fresh start. Years of accumulating debt isn’t just costly, it’s stressful. Whether they’re new bills or old –medical bills, car repair, utility bills, credit cards – paying them off in one fell swoop can feel pretty amazing. So can deleting all those due dates from your calendar.
Ready for a clean slate?
Debt consolidation can be a great way to reduce stress, save money and kick off healthy new financial habits. Remember to do your research to find the best debt consolidation loan to meet your needs. With the right loan and a good plan, this could be your chance for a brand-new start.
1. DeMatteo, Megan. “Most people get personal loans for debt consolidation—here’s the average amount.” cnbc.com. https://www.cnbc.com/select/average-personal-loan-amount-for-debt-consolidation/ (accessed August 19, 2020).
2. El Issa, Erin. “2019 American Household Credit Card Debt Study.” Nerdwallet.com. https://www.nerdwallet.com/blog/average-credit-card-debt-household (accessed August 19, 2020).
3. Leonhardt, Megan. “Late fees, overdrafts and even fraud cost Americans an extra $577 annually.” cnbc.com. https://www.cnbc.com/2020/07/14/us-households-spend-an-extra-577-dollars-annually-on-hidden-bill-costs.html (accessed August 19, 2020)
4. Fottrell, Quentin. “How long does it take to pay a $2,000 credit card debt with minimum payments?” MarketWatch.com. https://www.marketwatch.com/story/how-long-does-it-take-to-clear-a-2000-credit-card-with-minimum-payments-2015-07-07 (access August 19, 2020).