If you’re having a hard time paying off $10,000 or more in debt, have multiple creditors, or are struggling to meet your monthly installment payments on your debts, then yes: debt consolidation is a good idea.
But what is it, exactly? Debt consolidation helps people get out of debt by combining all of their debts into one, easy-to-handle, monthly payment.
How you approach debt consolidation can be as hands-off or hands-on as you like. Some folks prefer to hire a debt consolidation company to combine their debts for them, while others might want to take out a debt consolidation loan and square the details on their own.
To help you decide whether debt consolidation is right for you (and which strategy makes the most sense for your situation), we’ll walk you through five reasons to consider debt consolidation as well as three potential drawbacks to think about.
Debt consolidation can give you the chance to:
1) Focus on One Payment
If you have your debts consolidated, you’ll only be responsible for a single, monthly payment. No more phone reminders, sticky notes, or calendar markups: with a consolidated loan, you only have to meet one payment deadline each month.
2) Pay the Same Installment Every Month
Keeping up with your monthly installment payments on your debts can be hard enough. If you have multiple payments to make, you quickly have an organizational nightmare on your hands.
Debt consolidation can help clear the mess. If you consolidate your debts, you’ll pay the same installment fee every month, making it all the easier to balance your budget.
3) Land a Lower Interest Rate
Depending on your credit, the interest you pay on a debt consolidation loan might be lower than the interest you’re currently paying on your debts.
4) Improve Your Credit Score
Although taking out a debt consolidation loan could sting your credit at first, the tide can quickly turn for the better. How often you make payments on-time makes up for 35% of your credit score. If having one single loan makes it easier to pay your one bill every month, you can actually improve your score.
5) Lower Your Monthly Payments
As debt consolidation loans can require a longer loan term than credit card or medical debts, your monthly payments towards your loans are likely to be lower than your previous debts. When comparing debt consolidation loans, look at the overall cost of the loan as well as the loan’s APR to make sure you’re not paying more for this new loan compared to what you owed for your unconsolidated debts.
Debt consolidation also has a few potential downsides:
1) There Might Be Additional Costs
In addition to paying back the principal and interest, debt consolidation loan providers may charge loan origination fees, balance transfer fees, closing fees, or annual fees. When comparing debt consolidation programs, try to avoid loans or companies that tack on these additional fees.
2) You Risk a Higher Interest Rate
If your credit isn’t great, the interest rate on your debt consolidation loan may be higher than the interest rates on your original debts. In this case, you’d still enjoy the organizational benefit of a single loan payment, but you may owe more money over the life of your new loan when compared to your old debts.
The good news is that you can shop for a debt consolidation loan relatively risk-free (just make sure when receiving a quote that it only does a "soft pull" on your credit score). If you don't find a loan that puts you in a better financial position, you're free to walk away without hurting your score.
3) Missed Payments Could Incur Greater Fees
If you miss a payment on a debt consolidation loan, you run the risk of being charged a late payment fee. In addition to the hit to your wallet, a missed payment could immediately lower your credit score.
Have Multiple Debts? Debt Consolidation Might be a Good Idea
Despite a few drawbacks, debt consolidation programs can help people pay off their debts. If you have multiple debts, owe $10,000 or more, or are struggling to meet the high price of your monthly installment payments, debt consolidation could be your answer to lowering ever-rising debts.
Seriously considering debt consolidation? Start by getting free quotes from debt consolidation companies and loan providers. Once you’re armed with a personalized quote, you’ll have a better idea of whether or not debt consolidation is the right financial solution for you.