Loan consolidation can be a great tool to get your finances on track, but it isn’t the right choice for every situation. To better understand if your debt could benefit from this financial move, it is helpful to understand more about the process, the benefits, and the drawbacks.
What is a Loan Consolidation?
Consolidation involves taking multiple debts and rolling them into one repayment plan. Most commonly, you move to one that has a lower interest rate. The existing debt is paid off, and you are responsible for repaying the new loan. Moving your existing debt to a single loan with a lower interest rate allows you to lower your monthly payment, have a shorter repayment period, or both. It is a great tool for freeing up money in your budget.
What Types of Loans Can You Consolidate?
Student loans and credit card debt are frequent targets of this type of repayment plan. A student loan consolidation allows you to roll into a single repayment plan. If this sounds like something you would benefit from, but aren’t sure where to start or even what information the lender may need, there is an available guide that will answer all your questions and help you decide if this is right for you.
Debt can creep up on you slowly. If you find yourself making minimum payments, routinely charging living expenses and not paying them off in full, or if looking at the amount you owe makes you nervous, consolidation may be a good choice. Credit card debt is particularly painful because it typically comes with a high-interest rate.
If you are only making the minimum payments, it can be difficult to pay down the principal due to the interest added to your account each month. Consolidation is perfect for breaking this cycle. Consolidation allows you to pay off your existing credit cards and repay these expenses at a much lower interest rate.
Once you take the initial steps toward consolidation, it is important to maintain your financial health. After consolidating your student loans, you will probably have the extra money in your budget. You can choose to direct that toward other, existing debt, target the remaining principle, or strengthen your emergency fund.
After paying off your credit card debt, it is important to put your credit cards away so you do not end up repeating the cycle. As long as you feel comfortable that you can avoid using your cards, do not cancel them.
Good credit is important, and one thing that has a tremendous impact on your credit score is the length of your credit history. If you cancel your cards, you will need to rebuild that history from zero.
Stick the cards in a drawer. By not carrying them around, you are less likely to spend impulsively. Another trick is to delete your saved payment information from your computer browser, online stores, and any apps. It is much easier to talk yourself out of spending if you have to physically go into another room, get the card, and enter the information.