Financial decisions can be tough sometimes. And if you’re thinking about debt consolidation, you may be questioning if it’s the right call for you.
A great first step is what you’re doing right now — researching. After all, a debt consolidation loan can help lower monthly payments and stress, but it’s also a long-term commitment. Here are some situations and examples to explain when consolidating debt with a personal loan might be a good idea:
You can’t afford your monthly payments
Everyone’s financial situation is different. Even if you have a handle on your monthly bills, something out of your control could happen that puts you in a tough spot. With a debt consolidation loan, the terms of your loan could allow you to keep paying off your debt consistently but pay less each month. For example:
Victor had $21,000 in credit card debt. He was able to make his minimum monthly payments of $750 but his rent went up and he needed a way to save at least $200 a month.
Victor applied for a debt consolidation loan for $21,000, was approved and paid off all his credit card debt. The terms of his loan are 5 years with a 15% APR which means he only pays $499.41 a month now instead of $750. That’s over 1/3 less than before, and by saving $250.59 a month, he can afford his new rent with extra money to spare.
To see how much you could save with debt consolidation, check out our debt consolidation calculator.
You have trouble paying bills on time
Trying to keep track of all your due dates can get confusing. And even if you are organized, your pay days or income may not match up with your due dates. With debt consolidation, you can save stress and avoid late fees by only having one monthly payment to remember. Here’s a real-life example of how a debt consolidation loan could help in this situation:
Jenny had 9 different bills due every month. She wrote all of her due dates on a calendar, but her home and work life were so busy she sometimes forgot to send in her payments.
After paying three late fees in one month, Jenny decided to apply for a debt consolidation loan. Once she was approved, she paid off all of her old auto repair bills and credit card debt. Now she has simplified her expenses to rent, utility bills and one personal loan payment.
You could potentially save money on interest
Saving money on interest can be good for anyone. And if you have one or more debts with high interest, rolling them into one new debt consolidation loan could help you save money on interest month after month. Here’s an example with medical debt and credit card debt:
Steve broke his ankle and didn’t have health insurance. His hospital bills totaled $5,000, and since he didn’t have the money available right away, he ended up taking a high-interest loan from the hospital.
After researching his options, Steve realized he could pay off his medical debt and one of his high-interest credit cards with one new personal loan. He applied for the loan, and thanks to his good credit score, was approved for an interest rate 10% lower than both accounts he paid off.
When debt consolidation might not be a good idea
These can vary per person, but a few common scenarios include:
- Your debt amount is relatively small
- Your debt consolidation loan offers have a higher interest rate than your existing debt
- The fees for your debt consolidation loan will eliminate all your potential savings
It’s a good idea if it’s good for you
Debt consolidation certainly has its upsides. However, those upsides don’t apply to everyone, so it’s up to you to research and decide what’s best for your financial situation. If you’re still undecided or could use some more information, check out these signs that debt consolidation may be right for you.