Being in debt can make you feel isolated, alone, and depressed. You may be facing five or more creditors, and you could be overwhelmed about who to pay first.
Not being able to keep up with all the different balances and their due dates can have an adverse effect because you can accidentally miss a payment and be slapped with a fee and an even higher balance.
Getting a personal loan to consolidate debt can be a smart option if you do your research and calculate your interest rate and fees well.
Let’s discuss debt consolidation loans and how they work. Keep reading to find out how to use a personal loan to consolidate debt, and whether it’s right for you.
How do Debt Consolidation Loans Work?
Consolidating your debt can be an excellent way to get your debt paid off sooner. The idea is to get a lower interest rate, replacing all the higher-interest balances with a single low-interest loan.
The bank where you have a checking or savings account is the best place to get a personal loan. They may offer an attractive rate because you have an ongoing relationship with them that they want to preserve.
You can also check other avenues. A peer-to-peer network found online may loan you money at a lower rate. Peer-to-peer loans come from individuals who pool money together to lend to people. Then you make payments to them as you would to a bank.
Another way to get a low-interest rate is to get a home equity line of credit if you’re a homeowner. These rates will be very low because you are borrowing money against your house.
What are the Benefits of Consolidating Debt?
The main advantage of consolidating your debt into one personal loan is the lower interest rate. Having a lower interest rate means you’ll be able to pay the debt off sooner and begin building your financial independence.
Another benefit is simplifying your bill payments. Making just one payment will make your life easier and can give you peace of mind. It will make budgeting and planning for your financial future much smoother because you’ll know what to expect financially.
One of the best benefits is being able to avoid drastic measures like bankruptcy. You’ll save your credit and preserve your score by being proactive with your financial problems.
What to Avoid when Consolidating Debt
Consolidating your debt can save your credit score as long as you don’t go through a credit counseling program. Credit counselors offer debt consolidation, and they’ll lower your interest rates. But, they will also shut your credit card accounts.
Closing your card accounts may sound like a good idea, but a drastic move like that can hurt your credit.
Another thing to watch out for is debt consolidation companies that offer to solve your problems, and some companies make it seem a little to good to be true. These companies are most likely scammers who would lock you in to a super high interest rate. Avoid these companies like the plague, and call your trusted bank instead.
You’ll also need to be careful about not going back to your credit cards. When you consolidate debt, it can be tempting to take out a personal loan at the lower rate, and then continue using your old accounts when you need more money. Using both the new personal loan and the older cards can be a downward spiral because you’ll just be racking up more debt overall.
Always correct your debt spending habits or prevent yourself from using old credit lines once you have your debt consolidation plan in place. Otherwise, your financial problems will compound, and you’ll end up worse than when you started.
Using a personal loan to consolidate debt can be a clever idea if you do your calculations right and borrow the money from a reputable lender.
Be sure to ween yourself completely away from using credit after you’ve taken out a loan. Sticking to cash and a debit card will place you on the path to financial freedom.
What has been your experience with consolidating debt? Has it worked for you?