Is debt consolidation right for you? Online articles outlining debt consolidation’s “pros and cons” are plentiful. Today, we’re going to focus on the “pros.” In most situations, debt consolidation is beneficial to the person trying to pay off their debt. There are several reasons for that — below, we’ve listed 10 key ones.
1. Consolidate to a Single Monthly Payment
According to Dictionary.com, the term “consolidation” means “combining a number of things into a single more effective whole.” The keyword to pay attention to in that definition is “effective.” From a financial management perspective, managing one payment is more effective than trying to juggle several smaller payments. This is a great reason to consolidate your debt.
2. Eliminate High-Interest Rates
You’re not always guaranteed lower interest rates when you consolidate debt. Ideally, you’ll want to take out a low-interest personal installment loan that can pay off all your high-interest credit card debt. The interest rate reduction is one of the key benefits of debt consolidation. If lower rates are unavailable, consolidating to a single payment is still an organizational benefit.
3. Streamline Budgeting and Financial Planning
Expanding on the previous point, consolidating all your credit card debt into one single monthly loan payment makes budgeting simpler. Installment loans used for debt consolidation typically have a fixed interest rate and fixed monthly payment. That’s easy to budget, and it makes financial planning simpler because you know exactly what your debt expenses are.
4. Reduce Debt-to-Income Ratio
Most consumers don’t hear the words “debt-to-income ratio” (DTI) until they apply for a mortgage. Lenders use DTI to measure a prospective borrower’s ability to make their monthly payments on time. Debt consolidation can lower your DTI more quickly because you’ll be paying off outstanding debt faster. That’s important if you plan on buying a house someday.
5. Improve Your Credit Score
Taking on a debt consolidation loan will initially lower your credit score. Using the funds from that loan to pay off outstanding credit card debt will improve your score, but it may take some time for that to happen. Be patient. Every payment on the installment loan lowers your “amounts owed” and improves your DTI. Those are both factors in calculating a credit score.
6. Avoid Late Payments and Fees
You’ll still need to make a monthly loan payment. Doing that once a month is easier than trying to get several smaller payments out on time. How many times have you missed a payment and ended up paying a late fee? Consolidating your smaller debts into one single loan makes that scenario less likely, especially if you put your loan payments on autopay.
7. Pay Off Debt Cheaper and Faster
One of the key benefits of debt consolidation that is often overlooked is that it can reduce the total amount you pay your creditors. Every month, credit card companies charge you a variable APR that includes interest and fees. With a debt consolidation loan, you eliminate that variable component and lower your interest rate, decreasing your overall debt. Do the math.
8. Reduce Stress so You Can Focus on Life
Being in debt is stressful. You might be feeling the effects of it just by reading this article. Debt consolidation can reduce that stress and give you a chance to focus on more important things in life. Your monthly loan payment should be significantly less than the total of the credit card payments you consolidate. Enjoy that money now or save it for a special occasion.
9. An Opportunity to Develop a Savings Mindset
A savings mindset isn’t optional if you want to achieve real success with debt consolidation. Far too many consumers consolidate their credit card debt with a loan and then run up their card balances again before the loan is paid off. To avoid that, make a commitment to pay cash or use your debit card for purchases. If you don’t have the money, you can’t afford the item.
10. Give Yourself a Shot to Retire Debt Free
No one wants to carry debt into retirement, especially credit card debt. Consolidating now can give you a shot to retire debt-free. Eliminate high interest rates, streamline your budget, and pay your debt off faster and cheaper. Develop a savings mindset while you do this, and your retirement nest egg should grow nicely over the next few years.