There are plenty of good reasons to get a personal loan, but there's also no denying that keeping track of various loan payments can be overwhelming and stressful. Are you someone who has to deal with multiple debt payments every month? If so, simplifying to a single consolidated loan could make your life and repayment of your loans so much easier.
As per an Experian study, individual debt in the US was roughly around $92,727 in 2020. Now, this could mean that a consumer might have borrowed funds using a mix of loan types like mortgage loans, auto loans, student loans, credit card debts, personal loans, and so on.
To eliminate the hassle of multiple bills or lower your total monthly payments, you can think of consolidating your debt. So here’s everything you need to know about debt consolidation and debt consolidation loans to manage your existing debts better.
What Is Debt Consolidation?
In simple words, the process of using funds from a new loan to pay off one or more existing loan obligations is called Debt Consolidation. The idea is to get out of multiple high-interest debts like credit cards and switch to a new loan with favorable terms such as a lower interest rate.
Now that you know the definition of debt consolidation, it wouldn't be wrong to say that one of its best features is its simplicity. We’ve also highlighted other key benefits of consolidating debt into a personal loan below.
Pros And Cons Of Debt Consolidation
It’s always better to be left with one loan to be paid off instead of many. Although there are multiple benefits that you can aim to achieve through debt consolidation, there are some disadvantages that you need to keep in mind too.
Pros
Combines Multiple Debts Into One
When multiple due dates become difficult to manage, or you're dealing with debt collectors, you can use debt consolidation as a tool to pay off all your existing bills at once. You will then have to remember to pay only one monthly payment instead of juggling between multiple loans and their due dates.
Fix Payments And Fixed Interest Rates
Unlike credit cards having variable interest rates that might change with market conditions, debt consolidation loans offer you fixed interest rates. This means there will be a fixed monthly payment amount to be paid on a set due date.
Good Way To Save Money On Interest
If the interest rate you get on your new loan is lower than the average interest rates of all your existing loans, you can save some money with debt consolidation. That’s why most people have an eye for debt consolidation when stuck with high-interest rate loans.
Definite Repayment Period
According to studies, you spend more with credit cards or revolving debt than cash, making it more difficult to resolve that debt. This is when debt consolidation comes in. If you take a personal loan to consolidate your debt, you know when you pay off your loan and decide the scheduled end date.
Potential To Boost Credit Score
By choosing the right debt consolidation option, you can bring your credit score on track. In addition, you might also be able to see a credit score improvement by getting out of debt with your bad credit.
Reduces Your Financial Stress
Undoubtedly, wrapping multiple debts into a single loan sounds like a hassle-free solution. Regardless of how much you owe, managing too many loan payments at once could lead to stress. Consolidation can reduce the number of bills you need to manage and put you in better mental shape.
Cons
Consolidating Fees And Cost
Apart from the interest rate, the cost of consolidating your debt may include origination fees, fees for loan set up, balance transfer, closing costs, and annual fees. Before starting the consolidation process, you should inquire about these costs to know if they are profitable.
May Encourage More Spending
People often tend to spend more money if they have more money to spend on hand. While debt consolidation helps you increase your monthly savings with a low interest rate, paying off credit card bills could help you gain back your spending power and encourage you to spend more.
How Does Debt Consolidation Work?
Debt repayment is not only a financial but also a psychological commitment. It would benefit you to learn how debt consolidation works and put you in a better financial situation.
As you know, the simple concept behind debt consolidation is to help you pay off your existing loans and leave you with just one loan to pay. Here's an example to help you better understand how consolidating your debt can work in your favor:
Let’s say you owe a total of $20,000 over two credit cards and two loans with interest rates ranging from 17% to 23%. Your monthly payment comes to $525 if you select a consistent loan term of 60 months.
Debt Type |
APR |
Balance |
Monthly payment |
Total interest paid |
| Credit Card #1 |
17% |
$5,000 | $124 | $2,456 |
| Credit Card #2 | 21% | $7,000 | $189 | $4,362 |
| Loan #1 | 19% | $6,000 | $156 | $3,339 |
| Loan #2 | 23% | $2,000 | $56 | $1,383 |
| Total | | $20,000 | $525 | $11,540 |
When you consolidate your debt with a personal loan of $20,000 with 15% APR, you will be able to save $50 each month and $17 each month with 18% APR.
New Loan |
15% |
$20,000 |
$476 |
$8,548 |
| New Loan | 18% | $20,000 | $508 | $10,472 |
So, clearly, by replacing all your existing loans with a low-interest debt consolidation loan, you’d be not only able to save money on interest but also lower your monthly payment over the same loan term.
How Does Debt Consolidation Affect Your Credit Score?
Since your payment history reflects 35 percent of your credit ratings, paying off multiple debts will positively affect your credit report. However, you should also be aware of instances during consolidating your debt that may slightly hurt your credit.
When you apply for a debt consolidation loan, your new lender can run a credit check which can lower your credit score. Secondly, when you consolidate multiple loans into one loan, you tend to lower your credit utilization ratio, again reducing your credit score.
The positive effects of debt consolidation clearly outweigh the negative ones. However, if you’re still unsure, you can seek advice from a financial professional or our loan officers at CASH 1.
Is Debt Consolidation Really A Good Idea?
The concept of debt consolidation seems to work best when you owe money to many creditors or credit card providers. There are other factors too that make debt consolidation an appealing option. Below are some of the situations when you can think of consolidating your debts:
- When you have a hard time paying bills or the monthly payments over the whole life of the loan.
- When it is possible to rebuild and repair your credit score by paying down your old debts.
- When you can qualify and pay for a comparatively low-interest debt consolidation loan.
- When your existing debts don’t charge any prepayment penalties for paying off the balance early.
- Lastly, you are just tired of managing multiple loans at once and wish to simplify your finances.
How To Consolidate Your Debt
- Calculate how much you owe in total
- Find out if debt consolidation is right for you
- Research different options to consolidating debt
- Determine the best loan option for your requirement
- Complete the debt consolidation loan application process
- Get approved and enjoy a single monthly payment with an affordable interest rate
The Best Ways To Consolidate Debt
Here’s a quick look at various options you can choose from to consolidate your debt:
Personal Loans
Being the most accessible debt consolidation option offered by many lenders, you can easily qualify for a personal loan with a fixed interest rate and fixed repayment period by furnishing just a few documents. It helps you to know how much you will be paying for your loan and for how long. Some lenders even don’t require you to have a magnificent credit score to apply for a personal loan for debt consolidation and also allow you to select your loan repayment term as per your budget.
Balance Transfer Credit Cards
Offered by various banks to help you pay down your debt, balance transfer credit cards can allow you to transfer all of your debt onto one credit card. It can result in a popular credit card consolidation tool when you have too many credit card debts. In addition, balance transfer credit cards provide you an interest-free introductory period which can save you money on interest.
Debt Management Plan
These are not loans but programs offered by a non-profit credit counseling agency to help you consolidate your debts. You can look forward to affordable monthly payments and a significant concession on interest rates of using a debt management plan. This method also helps you to get rid of debt in a relatively shorter period.
Home Equity Loans
You can approach banks, credit unions, or private lenders if you wish to borrow money using your home’s equity. Equity is nothing but the part of your home that you own outright. It is a type of secured loan where you use your home as collateral. You’ll also be glad to know that interest on home equity loans is tax-deductible.
Retirement Account
Also popularly known as an employer-sponsored retirement plan, companies offer their employees a 401 (k) retirement plan. This account allows you to borrow money that is your own to pay off your credit card debts. Since not all retirement plans allow you to borrow money, you should first check with your employer to know if you can get a 401 (k) loan to consolidate your debt or not.
Get A Personal Loan For Debt Consolidation
Now that you know the ins and outs of debt consolidation and wish to consolidate your debt using a personal loan, you’ll be glad to know that CASH 1 can help you.
Personal installment loans are a reliable way to access cash quickly. By promising to make regular payments, the borrower can use the money to pay off debt, cover rent, pay utility bills or other expenses. Short-term credit can be a good solution for individuals facing sudden expenses.
Since there is no traditional credit check, the loans are available to all borrowers who can provide proof of regular employment. All interested borrowers should consider their options carefully before agreeing to any form of credit.
Our friendly loan officers can also help you understand how you can benefit from the entire process of consolidation. By designing a new loan that will not burden your monthly budget, you can quickly gain control of your finances once again.