Trying to keep up with multiple debt payments can be a big headache. Each debt will have its own monthly due date, and some debts will have higher interest rates than others. To simplify their lives, many people consolidate their debt so they only have to deal with one monthly payment.
But, is consolidating debt a good idea?
To answer that question, we’ll take a look at how debt consolidation works and explore several important benefits.
How Does Debt Consolidation Work?
Debt consolidation is when you acquire a loan to pay off two or more existing debts. After obtaining a debt consolidation loan and paying off your debt, you then make a single fixed monthly payment to your lender until the loan is repaid.
The primary goal of debt consolidation is to repay your debt more efficiently. It can also help to protect your credit score from late or missed payments if money is tight.
Just a few types of debt you could consolidate include:
- Credit card debt
- Store card debt
- Car loans
- Medical bills
Debt consolidation loans are typically issued by banks and credit unions. Interest rates and terms will vary depending on the lender, and it’s a good idea to shop around to find the best deal before applying.
How to Apply for a Debt Consolidation Loan
Debt consolidation is easy. Within just a few days of applying for a debt consolidation loan, you could enjoy the convenience of repaying your debt with one monthly payment. The following steps outline the process.
Step 1: Add Up Your Debts
Add up all of your debts to find out how much money you will need to borrow. If you are unsure of the payoff amount on one of your debts, contact the lender and ask.
Step 2: Apply for a Debt Consolidation Loan
Apply for a debt consolidation loan with a credit union for the amount determined in Step 1. A lender will then review your financial situation. If you are approved, you can expect to receive the money you borrowed within 1-7 business days.
Step 3: Pay Off Your Debts
Use the money you borrowed to pay off all of your existing debts. You then repay your new debt consolidation loan with fixed monthly payments until it is paid off.
Why Should You Consider Consolidating Debt?
Everyone’s financial situation is unique, and there are several ways that you could benefit from debt consolidation. Before you apply, take the time to consider your goals and whether a new loan makes sense for you.
Save Money On Interest
Many forms of debt have very high interest rates, like credit cards, store cards, and payday loans.
Interest rates for credit cards, for example, can be as high as 25%. And, according to CNBC, interest rates for payday loans can be over 600%.
If you have one or more high-interest loans, you may be able to save big on interest with debt consolidation. The interest rate with your new loan, in comparison, will be much lower.
Pay Off Your Debt Faster
If you are currently paying only the minimum on your credit cards or other debt, it can feel like you are treading water and not making any progress. Instead of your balance shrinking, the compounding effects of high interest can actually cause your balance to grow.
By consolidating your debt, your monthly payments will be fixed and you will have a set number of payments to repay the loan. You can also work with your lender to structure a loan that will allow you to pay off your debt in less time.
Lower Your Monthly Payments
If your current debt has become unmanageable and you are having trouble making the payments, a debt consolidation loan can help you lower your payments. This is accomplished by structuring the loan so that you will take longer to pay it off.
An important negative of this strategy to consider is that the longer your loan term is, the more you will pay in interest. This may be preferable, however, to having to deal with missed or late payments and having your credit score damaged.
Simplify Your Life with One Easy Payment
Managing multiple payments each month can be a hassle. In addition to keeping up with all of the different due dates, you also have to take the time to pay each one separately. And if you accidentally forget a payment, it could result in a hit to your credit score, a late fee, and additional interest.
With debt consolidation, you only make one monthly payment. This will simplify your life and reduce stress.
Improve Your Credit Score
Several factors go into determining your credit score, and one of them is the credit utilization ratio. This ratio is a comparison of your credit limit to how much you are currently borrowing. A high credit utilization ratio could negatively affect your credit score.
The credit utilization ratio makes up 30% of your credit score, so you want to keep it as low as possible at all times. A debt consolidation loan can help you pay down your existing debt, which can free up your available credit and possibly improve your credit score.
Pay Off Your Debt—The Smart Way
Whether consolidating debt is a good idea or not depends on your unique financial situation. For many, it’s a great way to repay their debts and protect their credit scores when money is tight.
If you are currently struggling to repay debt from multiple sources, a debt consolidation loan from TEG Federal Credit Union can help you get control of your financial situation. Applying is easy, and you can do it in person, online, or by phone. We also offer a free credit review where we look at your financial situation and make recommendations on the best ways to pay off your debt.
Debt consolidation is just one of several strategies you can use to pay off your debt. Check out the following article to learn about a few more strategies you can use.