How and When to Consolidate Your Debt
Most people will encounter debt during their lifetime and it’s not uncommon to take on multiple types of debt at once—student loans, mortgage, credit cards, etc. If you’re feeling buried in monthly payments, it may be time to consolidate.
Debt may seem like a taboo topic, but it’s actually more common than you’d think. It can be exhausting and expensive making multiple monthly principal and interest payments, so maybe it’s time to consider consolidation.
What is Debt Consolidation?
Debt consolidation is one of several strategies to help you pay off debt faster. This process allows you to combine multiple debts into one single monthly payment. You’re able to do this by taking out a single personal loan that will cover the total amount of debt you’d like to merge.
There are two main types of personal loans:
- A secured loan, also called secured debt, is any debt that requires an asset for collateral purposes. An agreement is made between the lender and borrower that says this asset will be surrendered to the lender if the borrower does not repay the loan. An example of this would be a car loan.
- An unsecured loan, or unsecured debt, does not require collateral. This loan is given by the lender based on your loan repayment history and credit score. The borrower is required to sign a contract, but this type of loan is still riskier for lenders, so expect higher interest rates. An example of this would be a credit card.
Should I Consolidate My Debt?
Now that we’ve covered the basics, it’s time to determine if debt consolidation is right for you and your current financial situation. Remember that this strategy won’t work for everyone and is very dependent on how much debt you have, your income and your credit score.
The first two things you’ll want to consider before consolidating are if you qualify for any personal loans and if you can afford their respective interest rates. The higher your credit score, the more likely you are to qualify for a loan with lower interest. If your credit score has room to improve, you may still be able to qualify for certain loans, but your interest rate will be higher. Debt consolidation is most advantageous if you can secure an interest rate that is lower than all of your individual loans, helping you reduce your monthly payment and even pay off your debt faster.
Keep in mind that once you apply for a personal loan, if a credit check is required your score may temporarily drop. If you continue to make your payments in full and on time, the overall impact on your score should be minimal.
What Happens After I Consolidate?
If you’ve already made the decision to consolidate your loans, that’s great! The key to successfully consolidating and getting rid of debt is to make sure you make your payments on time. Consider updating your budget to include this new loan payment and make sure you keep your credit card balances down until you are debt free.