What is Loan Consolidation?
Are you having a tough time keeping up with multiple credit card, loan and credit line payments? If you’re struggling with paying down balances and you’re paying higher interest rates than you think you should, loan consolidation could be the answer.
Consolidating your payments under one account may save you money on interest, simplify your debt obligations and help you achieve your financial goals faster.
Understanding Loan Consolidation Basics
Consolidating your debts means rearranging and refinancing your debt by taking out one loan to pay off several smaller loans, credit lines and/or credit cards, preferably at a lower interest rate.
These loans are often unsecured personal loans, sometimes known as signature loans, and borrowers qualify for them based on their creditworthiness. Consolidation loans may be offered by banks, credit unions or other financial institutions, and are increasingly available from online lenders. If you have debt you’d like to consolidate, one of these loans could be the solution you’re looking for.
Who Should Consider Loan Consolidation?
A consolidation may help borrowers facing a variety of credit issues, including those who have:
- Multiple credit card balances that aren’t paid in full each month (people looking for credit card debt relief)
- High-interest credit card balances
- Difficulty tracking monthly payments on credit cards, credit lines and loans
- Difficulty affording the monthly minimum payments on each of their credit accounts
- A desire to pay their debt down faster to meet their long-term financial goals
Benefits of Consolidating Your Debt
When you consolidate credit cards or other debt, you may save both time and money. Now you’ll have just one payment to remember to make each month, instead of several credit card or loan payments. And one payment will make it easier to plan out your monthly budget, eliminating the confusion of how much to pay toward each line of credit every month.
Another benefit is that, often, consolidating debt into a personal loan results in a lower interest rate than you’re currently paying. Depending on the terms of your loan, you may also lower your overall monthly payments, freeing up extra cash to put toward savings.1
And if you take advantage of a no-interest or low-interest-rate credit card balance transfer offer to consolidate credit card debt, you may reduce your rate significantly.
What to Watch For When You Consolidate Debt
Doing your research before committing to a consolidation loan is important to ensure you’re getting the best loan for your particular situation. For example, if you’re considering a time-limited, low-interest credit card balance transfer offer, read the offer details carefully. When will the rate change, and can you pay off your total balance before that time?
Another thing to watch for are loans requiring you to consolidate all of your outstanding debt. These loans may require you to include lines of credit with low interest rates that don’t need to be consolidated, especially if they have a lower interest rate than the new loan.2
While loan consolidations can be helpful to reduce monthly payments and interest, and for simplifying budgets, it’s important to use them wisely and to have a spending plan going forward. After all, you don’t want to find yourself needing another consolidation loan a few months or years from now.