If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. However, a debt consolidation loan doesn't erase your debt and, in the end, you may end up paying more. Here are the different types of debt consolidation and what you should consider before applying for a loan. Consolidating your debt can have a number of advantages, such as faster and more simplified repayment and lower interest payments.
It depends on the type of information that is reported to the credit bureaus. If you don't make any payments on your debt consolidation loan, that information will remain on your credit report for seven years before being automatically deleted. However, positive information, such as the loans you have paid on a daily basis, will remain on your credit report for much longer than 10 years. Before you apply, we recommend that you carefully consider whether consolidating your current debt is the right choice for you.
Consolidating multiple debts means you'll have only one monthly payment, but you may not reduce or pay off your debt sooner. The reduction in payment can come from a lower interest rate, a longer loan term, or a combination of both. By extending the term of the loan, you can pay more interest over the life of the loan. By understanding how consolidating your debt benefits you, you'll be in a better position to decide if it's the right choice for you.
If you have several major bills that need to be paid monthly, consider that this is the first sign that debt consolidation could be a good next step for you. Ultimately, a debt consolidation loan won't solve your financial problems if you're struggling to stick to a budget. In some cases, it may be beneficial to aggressively repay your current debt instead of applying for a new loan. The process of debt consolidation with a personal loan involves using the proceeds to pay off each individual loan.
Debt consolidation loans may be the right choice for some borrowers, but there are other options that might be better suited for others. Debt consolidation could temporarily affect your credit rating in a negative way due to a credit inquiry, but in the long term it can improve your credit rating if you use it correctly. Soon after becoming debt-free, many borrowers slip back into unhealthy habits and eventually accumulate more debt. One of the major benefits of debt consolidation is the ability to receive a lower interest rate, which can help you save hundreds or even thousands of dollars in the long run.
Before you consolidate your debt, it's important to review your current credit card and loan agreements to determine the APR you're paying, so you can look for financial products that can save you money. For example, it's not worth consolidating if you can't get a lower APR on the new form of financing than what you're currently paying for your debts. Getting out of debt is generally much more difficult than going into debt, especially if you end up with a large balance and a high interest rate, making it look like it will take more than a decade to pay them off. If you couldn't qualify for a lower interest rate than what you're already paying for your current loans, debt consolidation might not make sense.
Debt consolidation can help you keep track of payments, get a lower interest rate, and pay off your debt faster. While some lenders offer specialized debt consolidation loans, you can use most standard personal loans for debt consolidation. And, if you're working toward a debt-free lifestyle, you'll have a better idea of when all your debts will be paid off.