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Is Debt Consolidation Right for Me?

March 21, 2023

To find out whether debt consolidation is a good idea for you, you'll need first to understand what it is and how it works.

Debt consolidation can be really beneficial in a lot of ways. But that doesn't mean it's going to be the right decision for everyone. Whether you should consolidate your debts depends on several factors like what kind of debt you have, how much debt you have, and the consolidation providers you qualify for. Find out if debt consolidation is a good idea for you or not. 

What is Debt Consolidation? 

Before you can understand how debt consolidation works and if debt consolidation is right for you, you first need to understand what debt consolidation is. Put into simple terms, the word consolidate means to combine more than one thing into one thing.

debt consolidation definition

For example, if you have 3 loaves of bread dough, and you roll those 3 loaves of bread dough into 1 giant loaf of bread dough, then you have consolidated the 3 loaves into 1. 

You can do the same thing with debts. If you have multiple debts from different lenders or creditors, you can combine those multiple debts into 1. This is what debt consolidation is all about, rolling several debt accounts into one account. 

How Does Debt Consolidation Work?

So how does debt consolidation work exactly? The process can be simple or complicated depending on the financial institution or financial product you decide to use. But the consolidation product you use can determine if debt consolidation is a good idea for you and your circumstances or not. 

The entire idea behind debt consolidation is to bring multiple debt payments into one payment, by moving multiple debt accounts into one single account. There are different banks and other financial institutions that have financial products made to tackle this kind of project. 

1. Find a Debt Consolidation Loan 

The first thing you'll need to do if you want to consolidate multiple debts into one payment, is find the right financial institution and financial product for you and your needs. This may take some research and shopping around before you find the right one. 

2. Apply for a Debt Consolidation Loan 

Then, if you apply and qualify for this product, the financial institution you are using will reach out and repay the debts you owe at multiple locations. Now, instead of owing place A, B, and C money, your debts with them will be paid off and you'll now only owe your debt consolidation provider money instead. 

3. Combine Multiple Loans into One Debt Consolidation Loan

Essentially, debt consolidation is just like taking out a loan, but this loan is going to be used to pay off your other debts. This allows your debts to now be located in one place, with on monthly payment, from one lender. That way you won't have multiple monthly payments from multiple lenders anymore. 

how debt consolidation works

Does Debt Consolidation Hurt Your Credit?

One of the big deciding factors for if debt consolidation is a good idea for you is how it might impact your credit. Debt consolidation is a type of loan, so the impact you might experience on your credit score will depend on this loan's application process. Some loan applications involve what's called a soft credit pull while others involve a hard credit pull. 

A soft credit pull won't really affect your credit score, while a hard credit pull will. If you are worried about the effect a loan application might have on your credit, talk to a loan representative first to learn what kind of credit check the loan application performs. If you are worried about a late fee affecting your credit score, you could consider a short-term loan such as a payday loan or installment loan.

Common Ways to Consolidate Debt

If you think that debt consolidation is a good idea for you, there are several ways you could do it. There are several common ways to consolidate debts. You could perform a balance transfer, take out a personal loan, or apply for a home equity line of credit. Many lines of credit can be used to roll multiple debts into one, and there will be pros and cons to each one. 

credit card debt consolidation

Use a Credit Card

Some credit cards will allow you to transfer multiple credit balances onto your card. If you aren't sure if this is possible with your card, research your credit card online or reach out to a representative with your credit card company. 

You'll want to pay attention to things like interest rates and balance transfer fees before you go forward with using a credit card for debt consolidation.

personal loan for debt consolidation

Use a Personal Loan 

Some loans will allow you to use a personal loan for debt consolidation to pay off other debts so that you can have just one loan debt instead. Personal loans can be a useful choice as a debt consolidation loan because they don’t have to be used for a specific purpose the way some loans need to be. 

Make it Personal with a Personal Loan.

Compare the interest rates of your current lines of credit with the personal loan you are thinking about using to see what loan would save you the most on interest. 

home equity loan for debt consolidation

Use a Home Equity Loan 

A home equity loan is a personal loan that uses the value of your home to make this funding a secured loan option. By using the value of your house as collateral you can potentially get better loan terms. 

Use a Debt Consolidation Loan 

Still not sure if debt consolidation is a good idea for you? Try talking to the financial institutions you already know and trust. Some lenders will even provide loans that are expressly designed to consolidate your debt into one account and one payment. A debt consolidation loan is a type of personal loan that lets the borrower use the loan for the purpose of paying off debts from multiple creditors to roll those debts into one.

Some loans that are specifically designed for debts can even come with debt management plans to help customers get their finances in order and avoid more debt in the future. 

How to Consolidate Credit Card Debt

One of the common needs for rolling multiple debts into a single payment is credit card debt. If credit card users aren't careful, the amount of debt you have on your cards can really get out of hand. If you have multiple credit card debts you might want to look into whether debt consolidation is a good idea for you. 

If you have multiple credit card balances then you might want to know how to consolidate credit card debt. There are many ways to do this. You can use another credit card that has a lower interest rate to balance transfer credit card debt into just one card. But you could also use personal loans. 

Credit card debt can have a great impact on your credit report. As far as lines of credit go, credit cards are more useful as way to reap rewards, benefits, and perks as you are paying off debt from credit cards punctually each month. 

If you are going to need a larger loan that you'll need several months to pay off, it might be better to look into a personal loan that could have better rates and fees for a debt with a longer loan term than one single month. 

debt consolidation and factors to consider

Is Debt Consolidation a Good Idea for You?

Whether debt consolidation is a good idea for you or not will depend on several factors like the amount of debt you have, the kinds of debt you have, and how you want to consolidate those debts. 

For instance, consolidating student loans can be trickier than credit card balances because many student loans are regulated by the government. 

If your credit score is poor, you may also only qualify for certain types of debt consolidation loans. For instance, you might not qualify for a personal loan, but you might qualify for a home equity loan. 

Is it a Good Idea to Consolidate Credit Card Debt?

Whether debt consolidation is a good idea for you is really up to you to decide. One of the primary deciding factors is do you have high interest rates? If your debts have high interest rates, and you can get a debt consolidation loan with a lower interest rate, then it may be worth it to roll all your debts into a single loan with the lower interest rate. This can save you money on how much you pay in interest. 

In Conclusion,

Being in debt is not fun. It can be stressful and demanding on your monthly budget. By combining your monthly debt payments into one single monthly payment, you can be less stressed and potentially save more money.