Economic uncertainty can be devastating for your finances, especially when you’re in debt. The 2019 Consumer Debt Study shows the United States’ total consumer debt has reached $14.1 trillion.¹ If you’re one of the millions of Americans struggling to pay off your outstanding balance, then debt consolidation might be a helpful solution. There are certain benefits and information that are important to know before applying, which you can learn with a quick search.
Debt consolidation is a form of debt refinancing that involves taking out a loan to pay off your existing balances. Learning more about this process with a search online will help you determine if this makes sense for your financial situation.
Opat Suvi / ShutterstockHere is how debt consolidation could be helpful.
Debt Consolidation Offers Numerous Benefits
Debt consolidation condenses all of your debt into a single loan with one monthly payment. Experian reports the average family has three credit cards with average card debt of $4,427.² By consolidating your debt, those credit cards are paid off with the new loan, and you’ll begin to make one monthly payment towards the lienholder.
There are benefits to consolidating your debt. For starters, you could secure a lower interest rate on the loan compared to your credit cards. Interest rates can prolong your outstanding credit status, so a lower interest rate can help you pay it off faster. You could also end up with a lower monthly payment. You’ll also pay less in the long run if your interest rate decreases.
Your credit score can also improve with debt consolidation. Paying off your credit cards is one of the best ways to boost your credit score. In fact, your score could improve by 21 points within three months of paying it off with a loan.³
The most beneficial part of debt consolidation is simplifying your finances. Instead of worrying about paying multiple credit card bills on time with varying amounts, dates and interest rates, you’ll be making one simple payment instead. It can make handling your finances easier and less stressful.
Extra Cash For Your Essential Needs
During turbulent economic times, simplifying your finances can be a great help. You could be saving money each month by financing a loan instead of struggling to make your minimum monthly credit card payments.
Interest rates take a lot of money out of your pocket. By consolidating your debt, you could end up paying less total interest than all your previous rates combined.⁴ Your monthly minimum payment could also be lower than your previous ones combined, depending on the terms of your contract.
These savings can give you some relief. Instead of putting so much money towards paying off neverending debt, you can put those dollars towards necessities and savings which having multiple credit debts can prevent you from doing.
What To Know Before Applying
It’s important to remember that debt consolidation doesn’t rid you of debt. Rather, it transfers your debt into one lump sum and simplifies your monthly payments. Applying for debt consolidation means there will be a hard inquiry on your credit report which can potentially lower your score.
Those with high credit scores should be wary of consolidating debt. Some lenders might require collateral you don’t have. You could also end up with a high interest rate that isn’t worth agreeing to. Depending on the broker you choose to take out a loan from, there might be some additional fees.
The requirements for debt consolidation will differ from financial institutions. Make sure to do your research and know about the prerequisites that are needed before applying.
How To Apply
If you have out of control credit card bills that you think would be better managed under one sum, consider debt consolidation. It can simplify your finances, give you a lower interest rate and help to improve your credit score.
Once you decide debt consolidation is the right financial choice, it’s time to apply. There are a number of things to look out for when applying. When comparing lenders, look for key pieces of information to help you decide which one is best for you to apply.
You should find out the following information before applying to a loan:
- The interest rate
- Required credit score
- Loan amount and term
- Extra fees
Having this information will make it easier for you to compare lenders. Just make sure to consider the pros and cons of debt consolidation before deciding. It’s a major financial decision that might not be the best choice for everyone, especially those with a bad credit score.
After deciding whether or not to pursue this form of financing, you’ll have to pick a lender. Consider their interest rate, potential fees and the required credit score before officially signing a contract. Doing your research will ultimately help you make an informed decision on a lender.
