With the new year approaching, one of your resolutions might be to become debt-free once and for all. If so, you may consider consolidating your debt, which involves taking out a new loan or opening a new credit card—often with a lower interest rate—to pay off multiple debts or credit card balances.
One of the most popular ways to consolidate debt is a debt consolidation loan. These loans have their pros and cons, so make sure you understand how consolidating can help or hurt you. By doing your research and getting your credit in shape, you’ll know the loan you choose is the best debt consolidation loan for you.
Advantages of debt consolidation
Some benefits of getting a debt consolidation loan include:
- Saving money: Personal loans typically have low interest rates, though rates will vary depending on the loan term and length, and your credit score.
- Simplifying bill payments: Debt consolidation can simplify paying your bills each month since you’ll only have to worry about making one payment.
- Paying debt off faster: It can also help you pay your debt off faster if you consistently pay on time.
- Improved credit: On-time payments make up 35% of your credit score. A debt consolidation loan can make it more likely you’ll pay on time, giving your score a boost.
- Fixed timelines: You’ll have a set timeline for paying off your balance, with fixed payments each month.
Disadvantages of debt consolidation
Some downfalls of getting a debt consolidation loan include:
- You could wind up deeper in debt: A debt consolidation loan won’t help you if you make poor financial decisions. For example, if you don’t make your payments on time, you could risk damaging your credit and face penalty payments.
- You need good credit: You typically need a fair to good credit score to qualify for an unsecured debt consolidation loan. Lenders will usually look for a FICO score of 600 to 620, though this can vary depending on the issuer.
- There could be additional fees: There can be additional costs, such as annual fees.
- No lower-interest guarantee: There isn’t a guarantee that you’ll receive a lower interest rate when you consolidate your debt.
Tips for getting debt-free
A debt-consolidation loan will only work if you pair it with good financial habits. Here are a few suggestions for becoming debt-free with your debt consolidation loan:
- Look into a side hustle. If you need extra cash to pay your new payment on time, look into taking on a side hustle, such as freelance work.
- Stick to a budget. Create a monthly budget you’ll stick to, no questions asked. Figure out what’s a necessity (groceries) and what’s a luxury (your daily macchiato). Budgeting is one of the best ways to stay debt-free once you get there.
- Save unexpected $$: Whether a tax refund or a bonus at work, take your extra cash and put it straight towards your debt.