If you have multiple debts that you are struggling with staying on top of, a debt consolidation loan could be a good option to help you take back control of your finances in a responsible way.
It can be difficult to keep track of your finances and remember who to pay and when and in these circumstances, a debt consolidation loan is often a logical and practical way in which to streamline multiple debts into one payment and make it easier to stay on top of your finances.
What Are Debt Consolidation Loans and How Do They Work?
A debt consolidation loan is a way of streamlining different debts into one single debt repayment.
Usually this is done if you have many high-interest debts, for example payday loans or credit cards. Rather than pay multiple debts, on multiple different dates, incurring multiple interest charges, a debt consolidation loan allows you to put all of your loans together in one, lower-interest loan.
Why Would You Need To Consolidate Your Debts?
Debt consolidation could be a good idea if you have multiple forms of debt which you are struggling to stay on top of.
When you have multiple types of debt, it can be difficult to remember exactly how much you owe, the source of the loan, and the date of the monthly repayment. This can make it easy to lose track of your debts and miss payments, which can land you in a detrimental financial position.
If you choose to consolidate your debt, it can help you manage your finances more easily. Having just one payment to track means that you are less likely to miss payment dates and less likely to land yourself in a difficult financial situation.
Not only that, but debt consolidation often allows you to get on top of your debt quicker which means that you can repay your debt at an earlier date and may even save money on interest fees in the long run.
Is Debt Consolidation a Good Idea?
There are multiple benefits to debt consolidation that may be of interest if you are looking to make your debt more manageable.
- Simplify Your Debt Management
If you have multiple debts, staying on top of your finances can be very difficult. However, with a debt consolidation loan, you are combining your multiple debts into one single loan, making it far easier to manage. There is no longer the need to manage multiple due dates, interest fees and credit providers. This means that you are less likely to miss a payment and incur financial penalties. Knowing when your payment is due can help you get back in control of your finances so that you can pay back your debt quicker and more efficiently.
- Reduce Monthly Payments
When you move multiple debts into one debt consolidation loan, you may have a longer repayment period. However, if this is the case, it usually means that you are spreading out your payments over a longer time period and decreasing the value of your overall monthly payment. This makes it easier to budget as you are spending less each month on your debt, leaving more money to spend on other things.
- Lower Interest Rates
Depending on your specific financial situation, moving your debts into a debt consolidation loan could mean much lower interest rates. Often, moving high-interest loans into one, low-interest loan, can save you a lot of money in the long run. Personal loans typically incur far lower interest rates than credit cards or payday loans so moving these loans onto a debt consolidation personal loan could save you money each month on interest rates. However, your exact interest rate will be impacted by different factors such as your personal credit score.
- Repay Existing Debts Sooner
If you are saving money on interest rates, you could put more money aside each month to put towards extra payments on your loan. This could be a way to clear your debt quicker and save you money in the long term.
- Improve Your Credit Score
Debt consolidation loans might be able to boost your credit score. Although the initial application for a new loan might cause a temporary drop in your credit score, responsible management of debt can positively boost your credit score which could improve your chances of getting approved for credit in the future.
When is Debt Consolidation Not a Good Idea?
When you apply for a debt consolidation loan, as with applying for many types of loan, there could be a temporary dip in your credit score. Applying for a loan involves a hard credit check which will appear on your credit report. If you are rejected for the loan, it can cause short-term damage to your credit report and hurt your chances of being approved for loans or credit in the future. However, if you have done your research and looked to see that you meet the specific lending criteria before applying, it is less likely that you will be rejected for the loan.
If you have a bad credit score, you may not qualify for very favourable terms when taking out a loan. This means that you may not be eligible for low interest rates on a personal loan. If this is the case, it may not be cheaper for you to move your debts into one personal loan as the interest rates that you will need to pay may still be high. Weigh up the different costs and see if taking out a personal loan for debt consolidation will actually save you money each month.