By Connie Schlosberg
Debt consolidation is when you consolidate all your high-interest debt with a new loan. These loans collect many of your debts into one payment. This streamlines how many payments you must make. So, you’ll have one monthly due date for the combined debt. Sometimes, it’s possible to lower your monthly payment than what you are paying on your combined debt separately each month. You may even qualify for a loan that has lower interest rates than you are presently paying on your debt.
Should I get a debt consolidation loan?
Dealing with multiple payments and different due dates each month can be extremely stressful. You should consider consolidating your debt if:
- Work, school, and/or family obligations are major distractions in your day-to-day life.
- Staying organized is not your strong point.
- Simplifying your finances into one payment would make your life easier.
- Enjoying what you have is more valuable than managing your debt.
Tip! If you are curious about how much debt you have, try this debt analyzer tool before you get started.
Things to consider before consolidating your debt
- Many of the low-interest rates for debt consolidation loans may be introductory rates that only last for a few months. After that, your lender may increase the rate you have to pay. Thus, increasing your monthly payment as well as the interest you’ll pay over time.
- The loan may additionally have costs/fees that you wouldn’t have to pay if you continued to make on-time payments to your existing debt.
- Although your monthly payment might be lower, it may be because you’re paying over a longer time. This could mean that you will pay a lot more overall.
- When you are ready to shop for a debt consolidation loan, compare loan terms and interest rates to find out how much you’ll pay for the life of the loan. This can help you select the loan that saves you the most money.
- If you consider consolidating your debt through a second mortgage or a home equity line of credit, you will be required to use your home as collateral. You could potentially lose your home if you don’t make payments. On the brighter side, these loans may provide tax advantages that are not available with other types of credit.
- Some consolidation loans may require you to pay points. Typically, one point equals one percent of the amount you borrow.
What are the steps to take to consolidate my debt?
- First, make a list of your loan and credit card balances including the interest rate and monthly payment for each one.
- Next, consider your debt consolidation options such as a personal loan, home mortgage refinance, second mortgage, or line of credit.
- Loans can be secured or unsecured. Secured loans allow you to borrow against collateral while unsecured loans are based on your creditworthiness.
- When you find the option that works for you, you must use the money to pay off your outstanding debt.
I’ve consolidated my debt, what’s next?
Once you consolidate your debt, take the extra cash you should save each month and add it toward your savings goal. However, now that you worked hard to consolidate that debt, you need to be diligent in not using those credit cards. If you are serious about paying down your debt and achieving financial freedom, you need to stop buying on credit. Debt consolidation doesn’t magically make your debt – ahem, shopping sprees - disappear!
Take a hard-core look at your spending. It’s important to understand why you are in debt. If you have a lot of debt because you spend more than you earn, a debt consolidation loan probably won’t help you unless you slash your spending or boost your income.
Where can I get a debt consolidation loan?
Once you decide to consolidate your loan, check out these providers. DebtMD partners with many debt solution providers who are dedicated to helping you get out of debt. All debt solution providers are highly vetted by us and must meet certain standards and qualifications to partner with us. Your data is always secure, and we respect your privacy. You always have the choice to select the debt solution provider who will benefit you the most. To access our directory of providers, click here.