Debt consolidation: When is it a good idea?

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It is important to take action when bills and debt hang over you. It can be difficult to choose what to do. Debt consolidation is something you might consider if you are unsure if it is the right decision for you.

It’s easier today to research. A debt consolidation loan can help reduce stress and monthly expenses. Be sure to understand your loan terms. Below are examples and situations to show you how debt consolidation works and when consolidating debt using a personal loan may be a good idea.

You are unable to afford your monthly payments

Every individual’s financial situation can be unique. Even if everything is under control, it’s possible that something happens that causes you to be in a difficult place. You can consolidate your debt with a loan. The terms of the loan allow you not only to keep your debt paid off but also pay less each monthly. Here are some examples:

Victor had four credit cards totaling $21,000. He was able pay his minimum monthly payment of $750. However, his rent increased so he needed to find ways to save at least $200 each month.

Victor applied to consolidate his debt for $21,000. The loan was approved and he paid all of his credit cards debt. His terms for the loan are 60 month with an 18% APR. He pays only $533.26 per monthly now, instead of $750. It is nearly a third less than it was before. That’s almost a third of the monthly cost.

You can see how much you could reduce your debts by using our debt consolidation calculator.

You have difficulty paying your bills on the due date

Many reasons can cause people to struggle to make their monthly payments on time.

Jenny has three monthly bills due. These include bills for a hospital visit, auto repair, the IRS, and three store credit cards. However, Jenny travels frequently for work. Even though she has all her due dates written on a calendar and everything falls through, it is not uncommon for something to happen.

Janice, Dimitri and Janice each have separate bank accounts. They must manage the funds to make their monthly payments. They could make one monthly payment, which would simplify their lives.

Gretchen has just moved to a better job. She worries that her mailed loan statements might not reach her new home in time.

Tony’s payday falls short of the due dates for his credit cards and loans. He is constantly worried that he won’t be able pay his multiple household bills, and he might not have enough funds.

Irene is naturally a procrastinator. She knows that she would be more successful paying one bill in a timely manner than managing four.

It can be hard to remember all the due dates. Consolidating your debt can help you save stress and avoid any late fees. You only need one monthly payment.

You feel overwhelmed by your debt

It can be difficult to feel that you are in debt when it builds up. You might find yourself in a financial crisis due to an unexpected event such as a medical procedure that is expensive. Sometimes balances, even if you pay monthly fees, don’t seem like they will decrease.

A debt consolidation loan, unlike revolving creditors, is an installment loan. As long as you pay your loan on time, your balance will slowly decrease and be paid off within a specific time. Learn more about how installment credit differs from revolving. A personal loan for debt consolidation offers many benefits, including lower monthly payments and a fixed payoff date.

There are ways to save money on your interest

Refinance loans at a lower interest rate can save you money. Steve was uninsured when he broke his ankle. His hospital bills amounted to $5,000. Steve ended up getting a high rate loan from the hospital. Steve realized that he could pay his medical debt, and one his high-interest credit card bills with one new personal loan. Because of his credit history, he was approved to receive an interest rate 10% less than what he had paid on the other accounts.

Alicia discovered that her store credit and roof repair company had much higher interest rates than the debt consolidation loans for which they were eligible. She combined them all into one monthly installment with a lower fixed-interest rate. Her debt consolidation spread her monthly payments over five year, significantly lowering her monthly payment and saving on interest.

Christy was regularly owing late charges. A debt consolidation loan was an easy way to get rid of late charges. With time, her credit score improved and she was able to get a lower interest rate for the car loan.

Saving money on interest is a good thing for everyone. A consolidation loan to consolidate debts that have high interest rates could be a good option.

You’re unable to pay down balances quickly

Minimal payments can lead to slow and painful progress. You might have to pay more than the minimum monthly payment to get rid of some debts.

A debt consolidation loan can be used to consolidate several high-interest debts.

A blank slate financial outlook is a great option for those who can’t afford minimum payments, or who anticipate large purchases such as a home and/or a car.

Take responsibility for your spending habits and financial problems. Are you living beyond what your means allow? Impulse shopping online Do you rely too heavily upon credit cards? Begin a healthy journey by creating a budget that you stick to. Discover other healthy financial habits to help you.

You would like to improve the credit score

A personal loan to consolidate your debts might help you improve your credit score. Because you will be paying off multiple accounts (including credit card debts) and increasing your credit available, your credit utilization ratio, which is an important component of your credit score, will drop. It’s possible to increase your credit score by paying on time the monthly installments of your new debt consolidation loan.

Consolidating debt can lead to potential traps

Debt consolidation doesn’t erase your debt. Instead, you will walk away with a refinance loan that has longer repayment terms. If you pay higher interest rates or additional fees, these terms could be harmful.

The promotional lower interest rate of a consolidation loan could sometimes become a higher one, which can result in you spending more money over the long-term than you would have spent without the loan.

Debt relief programs are the number one consumer complaint received by the Federal Trade Commission2. Before you decide to take the plunge, learn about the dangers of debt settlement firms.

It is not a good idea to consolidate debt

These situations can vary depending on the individual, but here are some examples:

  • Your debt amount may be relatively low
  • The interest rate of your debt consolidation loan offers is higher than the current debt.
  • You will lose all of your potential savings because of the fees you pay for your consolidation loan.

If it’s beneficial for you, debt consolidation can be a good option.

There are many benefits to understanding how debt consolidation works. However, these upsides won’t always apply to everyone. So it’s up for you to research and decide which option is best for yourself. These signs that debt consolidation might work for you if you’re still not sure or need more information.

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