When you have multiple outstanding debt sources, it can be a challenge to know what the best strategy is for improving your overall financial picture. What debt should you pay off first? Is there a way to simplify the process? Are there options to save money?
One potential strategy to regain control of your financial landscape is debt consolidation. Debt consolidation is the process of combining multiple debts into a single payment under one lender. Instead of making multiple payments to several different lenders, a new lender pays off all of your debts and then issues you a single loan to cover those costs. Not to be confused with debt settlement, debt consolidation is often a favorable option for people looking to take control of their debt.
When you can get a better interest rate
One of the chief reasons people choose to consolidate their debts is to save on interest costs. If you have several high-interest forms of debt, you may be able to get a lower overall interest rate by combining these debts together under a new loan. Often, you can get these better interest rates if your credit score has improved or if the interest rates on borrowing money have gone down.
When you can get more favorable repayment terms
While saving on interest costs is almost always the primary reason for consolidating debt, there are times when it's a smart move to lock in more favorable repayment terms. If you are struggling to keep up with your payments, you may be able to consolidate your debt to a lower monthly payment. Generally, this means spending more money in the long run, but it's a far better solution than defaulting on your loans and potentially ruining your credit.
When you have prepayment penalties
When you take out a debt consolidation loan, your new lender pays off all of your existing debt. The lender then issues you a new loan for the total of all the debt that was paid off. If your outstanding loans have prepayment penalties (where you're charged extra for paying them off early), you'll need to cover those costs with the new loan, which could erase the potential savings from a lower interest rate.
When the fees outweigh the benefits
Taking out a new loan to consolidate your debt isn't free. You'll need to pay origination fees and any other fees the new lender requires. If the savings from your lower interest rate doesn't outweigh the cost of the new loan, you're not saving any money, and all you'll be gaining is the convenience of a single payment. Make sure before you choose to move forward with debt consolidation that you take the time to crunch the numbers and ensure you're getting the outcome you want.
If you can save significantly or get more favorable repayment terms with a consolidated loan, debt consolidation could be a smart financial move. It's important you take your time, properly crunch the numbers, and make sure the potential new lender delivers what you're looking for. If everything checks out, debt consolidation may be the right move for you and a worthwhile boost to your overall financial health.