If you have goals for a more secure financial future, one of the first things you should do is pay off outstanding debts. However, credit card bills, student loans, auto loans, mortgages, medical bills, and other types of debt can add up quickly, and they can seem impossible to pay off.
If you’re in this situation, it’s important to know there are a number of ways you can start paying off your debt, and tools and people to help you do so. One of the ways that may work for you is by consolidating your debt through a debt consolidation loan.
Here is some information about what a debt consolidation loan is, how to know if consolidating your debt is right for you, and how to find the right consolidation loan to fit your needs.
What is a debt consolidation loan?
When you consolidate your debt, you combine multiple or all of your debts into one, lower-interest monthly payment. This can help you save money (that you’d otherwise be paying in interest) and pay off your debt faster.
With a debt consolidation loan, you’ll apply for a loan for the amount you owe on your existing debts, and once you’re approved, use the loan funds to pay off your debt balances. Then, you’ll pay down the new loan over time. There are different types of consolidation loans, but most have lower, fixed interest rates and firm repayment plans to make paying off debt easier.
Should I consolidate my debt?
If you want to save money, cut down on your number of monthly payments, and pay off your debt faster, you may want to consolidate your debt.
Debt consolidation loans help you pay off your outstanding debt quicker so that you don’t have long repayment timelines and aren’t paying more in interest. It’s also easier to make one monthly payment vs. multiple, and can help decrease chances of you missing a payment and incurring fees or penalties.
Finally, debt consolidation loans are typically fixed, meaning you’ll know exactly how long it will take to pay it off and when you’ll be debt free.
Ultimately, if your primary consideration for consolidating debt is your end savings and financial goals, it may be a good option.
How to find the right consolidation loan
To make finding the right loan easy, you can work with a financial advisor or use financial tools to help simplify your decisions and receive personalized recommendations. There are then a few questions to ask yourself, or work with an advisor to answer, to help find the right loan for you.
1. Understand your total debts and financial health, including how much you have in savings, your credit score, and information about your mortgage (if applicable). Gather information about each loan including the total amount, interest rate, and monthly payments.
Knowing how much you’ll need to cover with a loan, and the types of debts you have, can make finding the right type of loan easier.
2. Think about why you want to consolidate your loan. Is it because you want to contribute more to savings? Pay off your debt faster? Cut down on how much you pay in interest? There are different types of consolidation loans, and your reason for wanting one can inform which type you should apply for.
3. Gather your bills and credit card statements. This helps you to calculate how much you’re paying each month for bills in addition to loan payments, so you know how much more or less you can spend each month making debt payments. This can help you better compare products available.
4. Compare your options. If you work with an advisor or use a finance tool, they may provide a list of solutions for you that meet your needs. You can then prioritize loans based on how well they match your goals.
You can also use a debt consolidation loan to better understand potential savings in total interest, monthly payments for your consolidation option, and estimated debt-free timelines.
5. Get prequalified, which may give you an inside look at the types of offers you may receive, including interest rates and repayment terms. This can also help you make a final decision on the right consolidation loan for you.
Caitlyn is a freelance writer from the Cincinnati area with clients ranging from digital marketing agencies, insurance/finance companies, and healthcare organizations to travel and technology blogs. She loves reading, traveling, and camping—and hanging with her dogs Coco and Hamilton.