3 Benefits of Debt Consolidation
If you can relate to a time when unexpected expenses have piled up without a solution in sight, you may benefit from debt consolidation. Maybe you’ve been committed to paying down your outstanding debt, but it seems like it’s taking a long time to reduce the balances.
Debt consolidation is a repayment strategy that combines all of your debts into a single loan for one monthly payment. This requires taking out a new loan and transferring existing balances to that new loan.
The goal of debt consolidation is to give you more control over your monthly expenses. With debt consolidation you can determine how much money you are comfortable paying each month, and how long you would like to take to pay it off. While this reduces the number of payments you make each month, you’ll also be able to lower the amount of interest you pay on your debt. This can be incredibly helpful if you have several high-interest debts like credit cards, a car loan, and student loans.
Continue reading to discover the many benefits of debt consolidation.
1. Make One Monthly Payment
When you take several debts and consolidate them, you simplify your life. There’s no longer a need to keep up with multiple payments and due dates. You’ll see this makes it easier to pay down debt faster since there’s just one balance to focus your efforts.
Plus, if you’re able to lower your monthly payment by consolidating to a loan with a lower rate, you can use the money you save each month to pay extra towards your loan principal.
Missing and late payments cost you money in late fees; they also hurt your credit score, so consolidation can help you in more ways than one.
2. Increase Your Credit Score
When you consolidate your debt from multiple places into one loan, it could result in a temporary dip in credit score, due to the impact of a hard credit inquiry that occurs when you take out a new loan.
A hard credit inquiry is when your lender runs a credit check to gather information about how much debt you have, how long you’ve had it, and how well you’ve been paying it back. It gives your lender assurance that you will responsibly pay back your new loan with them.
Despite creating a temporary decrease in your credit score, in the long run, a debt consolidation loan could actually help you improve your credit.
Your credit score is based on other factors, including credit utilization, which measure how much of your available credit is in use. By getting a new loan and using it to pay off other debts, you may increase the amount of available credit you have without increasing the amount of actual credit used — which could boost your credit score.
Your payment history has a big impact on your credit score, so timely payments will certainly help improve your credit score. And, as you continue to pay down debt over time, this helps even more.
3. Reduce Overall Interest Paid
By consolidating your existing loans, credit cards, and other debts, you have the opportunity to lower the interest you pay.
Before applying for a debt consolidation loan, be sure to compare your current monthly payments, interest rates, and terms with those of the new loan in order to make sure the move indeed saves you money.
If you’re still wondering whether you could benefit from debt consolidation, check out our Ultimate Guide for more on this topic.
How to Reap the Benefits of Debt Consolidation
Let’s say you’re carrying a balance on two credit cards plus a student loan with varied interest rates. Instead of making three monthly payments, you can consolidate those three debts into one single debt. This could be done by taking out a debt consolidation loan and using that borrowed money to pay off the balances of your credit cards and student loan.
Then, you will make monthly payments toward your debt consolidation loan until the loan term ends. Keep in mind you’ll want to find a loan with a lower interest rate than what you originally had across your debts to help reduce your overall monthly payment.
Get a Debt Consolidation Loan and Start Saving Today!
Your life will definitely be easier and less complicated when you consolidate your debts. You’ll also save money along the way with a lower interest rate, and gain the advantage of a longer repayment window so you can better manage your daily budget over the short and long term.
The benefits of debt consolidation don’t end there, click below to learn more about what we offer at San Francisco Federal Credit Union.