At What Point Should I Consolidate My Debt
After hearing about all of the debt consolidation options out there, you may be left wondering, "How should I consolidate my debt?" The process of debt consolidation is more intuitive than most may think — you borrow money at a lower interest rate than you're currently paying and then use that money to pay off your existing debts. The result is that you only have to manage and pay off one debt instead of several different ones while simultaneously reducing your interest and potentially lowering your monthly payment.
How Debt Consolidation Works
First things first, look at the monthly payments, related interest rates and terms of your current debts. Shop available consolidation loan types to save in monthly payment, interest rates, or shorter term. Then choose a consolidation option that is more affordable than what you're currently paying.
Depending on the type of consolidation, you may choose to take out a loan or open a line of credit at the new, favorable interest rate. For loans – like a personal loan - you receive a lump sum of cash, that you can use to simply pay off the original amount. With a line of credit, you have continuous access to credit — such as a balance transfer to a more affordable credit card; the borrower can continue to borrow money at the lower rate in the future.
Whether it’s a loan or line of credit, use that money to pay off all of the debts you're consolidating. Once this step is complete, you no longer owe any money to those previous creditors. All previous debts would be paid through one monthly payment. This also may allow you to make lower payments and/or reduce the interest rate.
When Should I Consolidate My Debt?
There are several factors that can help you decide if debt consolidation is the right choice for you. The first is if you're paying a significant amount in payments due to high interest rates. A few examples of the types of debt that can be consolidated are credit card accounts, unsecured loans/lines, and medical debts.
Trying to keep track of different types of debt can be overwhelming. Consolidating takes multiple accounts and replaces them with a single account, giving you one easy monthly payment.
Finally, it may be a good time to consolidate your debt if you have months or years to go before your debt is paid off. It's worthwhile to consolidate when you still have many payments remaining because then you can reap the benefits through a lower payment and a better interest rate.
How Consolidating Debt Can Benefit You
Consolidating debt may offer one or more of the following advantages:
- Payment Savings:1 When you consolidate at a lower rate, you save money on monthly payments. Try using a debt consolidation calculator to see how much you can save in monthly payments over time.
- Lower Fixed Interest Rate: You can protect yourself from variable, rising interest rates by locking into a fixed rate which will never go up.
- Less Stress: Consolidating gives you one easy monthly payment, so you don't have to juggle multiple accounts.
Debt consolidation can help you gain control of your finances and take you further on your journey to financial wellness. Consolidation could lower your interest and/or your monthly payments, freeing up money that you can use to build a nest egg, invest, or pay off your loan a little sooner. Since consolidation gives you one easy payment, it takes a lot of the worry and confusion out of paying off multiple debts. There are no one-size-fits-all methods for consolidating debt, and the process is tailored to fit your financial situation. Ask your lending specialist about which option is right for you.