Input your search keywords and press Enter.

Debt Consolidation: What Is It and Should You Do It?

Debt consolidation allows you to reduce the stress of multiple payments with varied due dates by getting a single loan that has a lower rate. The loan gives you funds to clear all your debts, so you only have to make one monthly payment for the term of the loan. 

If you feel like you’re sinking under a mountain of debt, a debt consolidation loan is a good choice. 

Types of Debt Consolidation Loans

  • Home equity loans: Homeowners can opt for a home equity loan (HEL) which can be considered as a second mortgage or a refinance of the first mortgage using the available equity in their home to pay off the debt. As this loan is secured (with your home as collateral), you can get lower interest rates and longer repayment options. Lenders may also offer a home equity line of credit (HELOC) which offers the flexibility of drawing specific amounts of cash you need when you need it. This is like a revolving debt, similar to a credit card, but usually is subject to a variable interest rate that can change over the term of the loan.
  • Unsecured personal loans: An unsecured personal loan from a bank or credit card does not require you to offer collateral (hence why it is called unsecured). Due to this, its interest rates tend to be higher, and repayment terms tend to be shorter than that of a HEL/HELOC.
  • Balance transfer credit cards: These cards help you transfer your debts to a single credit card, that has an attractive introductory APR. Once the introductory period ends, these cards usually move to high APRs, which is self-defeating if you are trying to get out of high-interest debt. You will also have to pay for associated fees/charges.

Benefits of Debt Consolidation

A good debt consolidation strategy can help because

  • It helps reduce your monthly payments: With a debt consolidation plan, you can select terms that work for you like, a longer repayment period and/or a lower interest rate.
  • It can lower your interest charges: You can bring down your interest charges if you go in for a debt consolidation product with a lower interest rate than the rates applicable to your present debts.
  • It may improve your credit score: Debt consolidation could also improve your credit score, by helping you to pay off your debts more equally.
  • It helps you keep track of your payments: It simplifies your monthly bill paying cycle since you have only one payment to make instead of having to keep track of multiple payment dates for different loans.

While debt consolidation can help ease the financial stress of making multiple payments, it’s important to correct your spending habits to avoid getting into debt again.