After years of making payments to lenders, many decide to consolidate their debt into one loan versus keeping up with payments on several loans or credit cards. Being debt free may also be a goal but getting there starts with a plan that’s suited for your debt situation. When deciding on a plan, consider these pros and cons to help determine your options.
But first, let’s review what consolidating debt looks like.
Start by getting a basic understanding of what debt consolidation means and whether it can help you. When coming up with a plan, it can be hard to figure out where to start. However, if you lay out all your debts, payments and interest on current cards and loans, and you notice some of the following rings true, that’s the first big first step toward understanding whether debt consolidation is right for you.
Consider debt consolidation if:
Debt consolidation can be a good idea for borrowers who fall within these categories. But it’s also important to note that moving forward with consolidating only helps if you take steps to avoid adding too much new debt, and it’s always important to avoid taking on more debt than you can afford to repay. If habits like overspending pile up, it’s time to move forward with a plan to address those habits before jumping into consolidating debts.
Let’s take a look at some pros and cons of debt consolidation.
Consolidating debts can have its benefits. Here are a few advantages to help you plan.
A debt consolidation loan or credit card balance transfer may be a good way to organize debt payoff, but there are some disadvantages to keep in mind.
Consolidating debts: A few ways to do it
If you need a larger amount to help pay down debt, and if you’ve determined that debt consolidation is right for you, these options may help in your situation.
Consider a personal loan
Personal loans often have lower interest rates if you have good credit. If you choose this plan it will require you to take out one big personal loan to pay off all your separate loans, ultimately combining all your debt into one with one lender with one interest rate. That means when you receive your personal loan you are responsible for making sure you pay off all your multiple loans to begin your debt consolidation.
There are lenders that offer special debt consolidation loans, however those type of loans often have much higher interest rates and if you have good credit, you could be better off with taking a personal loan to consolidate versus a special debt consolidation loan. This may also be a good option if you have your spending under control and are 100% sure that you will not use the personal loan for anything other than paying off your debt for consolidation.
Refinance to pay off debt
Another option in consolidating debts can be refinancing a car loan or a mortgage. Although these are more than likely to be bigger loans, it can help lower your monthly payments and may also offer a lower interest rate for the new terms of the loan. Minimizing and lowering debt by refinancing bigger loans such as a car or mortgage can help you reallocate more of your income to tackle any higher interest rate loans you may have first versus your lower interest rate loans. Properly prioritizing the higher interest rate loans and paying them off first will help get rid of the higher payments sooner than later. This may be a good approach to eliminating and consolidating your debt.
Continue reading for more ways to manage your debt.