Combining several outstanding debts into a single loan reduces the amount of payments and interest rates you have to worry about. Consolidation can also improve your credit by reducing the chances of making a late payment or of missing a full payment. Debt consolidation loans can help you streamline your budget by allowing you to pay off debt in a simple monthly payment. Switching your credit card debt to a personal loan in installments also usually causes a significant increase in your credit rating, as this effectively lowers your credit utilization rate.
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. You can do this by taking out a new loan and using the funds to pay off your existing debts; personal loans are sometimes called debt consolidation loans when borrowers use the funds in this way. Using a new loan to pay off credit card balances doesn't address the root cause you got into debt. If you can qualify for a low interest rate, a debt consolidation loan can streamline the process of getting rid of your debt while saving you money.
One solution is to use a personal loan through companies such as SoFi, LightStream or Happy Money to consolidate your credit card debt into a monthly payment. Before the coronavirus pandemic, financial advisors used to recommend that people prioritize paying off debt first and foremost. Even if you know that consolidation is a good option, you should be eligible for a new credit account that will really help you. For example, if you apply for a debt consolidation loan to pay off multiple credit cards, your monthly loan payment may be lower than the combined minimum credit card payments.
To calculate your debt savings, try using a credit card payment calculator and a personal loan calculator. However, it's hard to know what goals to prioritize if you have a lot of credit card debt and few savings. Consolidation can make it easier to manage your household budget, since every balance you pay is one less bill than you'll have to track and pay each month. If you have a manageable amount of debt and just want to rearrange multiple bills with different interest rates, payments, and due dates, debt consolidation is a solid approach that you can tackle on your own.
Unlike a balance transfer, in which you transfer debt from one account to another, when you get a consolidation loan, the cash is deposited directly into your bank account and you can use it to pay off all your credit card debt in one go. There are two main ways to consolidate debt, which concentrate debt payments on a single monthly bill. Debt consolidation bundles several debts, usually high-interest debts, such as credit card bills, into a single payment. You can also look for credit cards that offer introductory offers with an annual percentage rate (APR) of 0% on balance transfers, which will allow you to consolidate the debt on the card and pay off the balance without accumulating any interest during the promotional period.