From personal and student loans to medical bills and credit cards, everyone accumulates debt in their lifetimes. When kept at a minimum and managed effectively, debt has financial advantages like an improved credit score and more affordable lending opportunities. On the other hand, too much debt can send your finances and wellbeing spiraling out of control. Fortunately, products like debt consolidation loans help those in need to get back on track.
What is a Debt Consolidation Loan?
A debt consolidation loan is a product offered by banks and private financial institutions for qualifying applicants. It is an installment loan with a fixed rate, fixed monthly rate, and repayment terms ranging from 1 to 5 years. Borrowers receive funds from the lender, which are used to pay off existing debt. Then, the loan is repaid based on the terms of your agreement.
What Are the Potential Benefits?
Here are a few quick potential benefits of debt consolidation loans:
- One monthly payment – When you have several different types of debt, each due on a different day, it can be challenging to manage. A loan eliminates these varying due dates and payment amounts, giving you one monthly payment.
- Lower interest rates – Let’s say you have three credit cards with interest rates of at least 17% each. Getting approved for a consolidation loan with an annual percentage of 6% would essentially save you money.
- Saves Money – Speaking of saving money, you’re putting more towards the principal balance with lower interest rates. This gets your debts paid faster, saving you even more money.
- Lower monthly payments – Though not always, the monthly payments for a debt consolidation loan are often much less than your existing debt payments.
Signs Debt Consolidation is Ideal for You
While debt consolidation loans have many potential benefits, it is best to evaluate your circumstances before applying. Below are some signs that a loan may be the best option to get your debt under control.
- You’re Making Late Payments – Are the varying due dates causing you to fall behind on your payments? If so, chances are you’re paying even more for in penalties. A debt consolidation loan gives you one monthly fee, which can be easier to incorporate into your budget for timelier payments.
- Minimum Payments Barely Scratch the Surface – If you find that your minimum payments aren’t doing much to lower the total balance, you might benefit from a loan. With lower interest rates, you’d be paying more towards the principal balance getting your debts paid off faster.
- Monthly Payments Are Too High – Between late fees, interest rates, and increasing bills, monthly payments can get out of hand. While results may vary, this debt consolidation calculator shows how a $600 monthly payment can be reduced to $382.
- You Can Afford It – Using a loan to pay off existing debts is only to your advantage if you can afford it. Though lower interest rates, better monthly management, and saving money are all great perks, if you fall behind on the consolidation loan, you’ll find yourself right back in the same position.
- You’ve Tried Other Debt Management Practices – Loans should only be considered if you’ve tried other ways to reduce or manage your debt with little to no relief. For example, have you created a budget, eliminated unnecessary spending, negotiated with your creditors, and made timely payments? If the answer is yes, but you’re overwhelmed by debt, then a loan may provide the solution.
Debt may be a part of life, but if it’s gotten out of control and caused many issues, you should seek relief. While there are many options out there for those who want to regain control of their finances, debt consolidation loans have proven effective. Before deciding if this type of loan is right for you, consider the factors listed above, then complete an application with a reputable financial institution.