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From lowering your monthly payments to saving on interest — or both — here are a few benefits of consolidating your debt:
If your credit has improved since you took out your loan, there’s a chance you could qualify for a lower rate by consolidating. Even if your credit score hasn’t improved, a personal loan may be able to give you a lower rate if you’re struggling with credit card debt. That’s because personal loans typically come with lower interest rates than credit cards.
When loan repayments are stretching your budget thin, consolidating for a longer term will lower the amount you owe each month. This can help you avoid becoming delinquent or defaulting.
Rather than keeping track of multiple repayments, debt consolidation allows you to move everything into one. This can make it easier to manage your spending and create a budget.
Not only does debt consolidation let you change your interest rate — you can also change the type of interest rate you have.
If you currently have fixed payments but think the market can give you even lower variable rates, you can consolidate with a variable-rate loan or credit card. Or if you’d rather have one reliable cost each month, you can consolidate with a fixed-rate loan.
Fixed vs. variable rates: Which should you choose?
Not happy with your lender or credit card company? Debt consolidation offers an opportunity to gracefully part ways before your account is fully paid off.
A debt consolidation loan can help you maintain a record of on-time repayments — especially if you consolidate with a longer term to lower your monthly cost.
Consolidating credit card debt with a personal loan helps you commit to a debt repayment plan. Sometimes seeing a light at the end of the tunnel can give you the motivation to get other parts of your personal finances back on track.
Debt consolidation isn’t right for everyone. And there are a few costs and risks you should consider before diving in head first.
There’s a chance you won’t qualify for a lower rate. And even if you do, applying for a longer term means there’s more time for interest to add up. In this case, consolidation could cost you more in the long run.
Debt consolidation can come with several fees, which might cancel out any savings.
Debt consolidation won’t fix long-term overspending or prepare you for an emergency. If you don’t combine it with an effort to curb spending or build an emergency fund, you could find yourself in a hole that you won’t be able to consolidate your way out of. Having too much debt can make it difficult to stay on top of repayments and damage your credit.
You might not be able to qualify for debt consolidation at all if you have a high debt-to-income (DTI) ratio. If you owe more than 50% of your salary before taxes each month, you likely won’t qualify at all. Having a high DTI can also make it difficult to qualify for competitive rates.
Moving all of your debt into one place means you don’t get to prioritize if you aren’t able to afford your full repayments. Debt consolidation gives you one all-or-nothing payment. And if you consolidate credit card debt with a loan, you won’t have the flexibility of those minimum monthly payments to rely on when money gets tight.
Which type of debt consolidation you choose can affect how much you save — and whether it’s a good move.
Also known as a debt consolidation loan, an unsecured personal loan doesn’t require any collateral. This option typically allows you to pay off your debt over three to seven years at rates from 6% to 36%.
These personal loans require collateral — usually a savings account, certificate of deposit (CD) or other asset with monetary value that your lender can take if you don’t repay the loan. They come with similar rates and terms as a debt consolidation loan. But the collateral offsets the risk for the lender, helping you qualify for a better deal.
This allows you to move other credit balances into one new credit card. The main draw is that it often comes with a 0% promotional introductory rate for around the first 12 to 21 months.
Home equity loans and lines of credit (HELOCs) are secured loans that use your home as collateral. They offer some of the lowest rates out there, but you risk losing your home should you default.
You can borrow from most employer-sponsored retirement accounts to pay off your debt. These typically come with an interest rate of around 4% or 5%, which you pay back into your 401(k) over five years.
Student loan refinancing is the closest thing to debt consolidation for student loans — which personal loan providers generally won’t consolidate. Rates can start as low as 2% with terms from five to 25 years.
Debt consolidation can be helpful if you generally have strong finances but want to better manage your debt payments. Learn more about how it works by reading our guide to debt consolidation. Or if you don’t think it’s right for you, consider one of these other ways to manage your debt.
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