If you’re one of the many Americans struggling with debt, you may be considering a debt consolidation loan but do you know what types of debt you can consolidate? A consolidation loan could help you get your finances under control. By combining all your debts into one loan, you can reduce your overall interest rate and make one affordable monthly payment.
Consolidating debt has become a popular way to make loans more affordable, particularly with consumer debt totaling over $15 trillion in 2021. By consolidating multiple debts into one loan with a lower interest rate, people can save money on interest and pay off their debt faster.
When it comes to getting your finances in order, a debt consolidation loan can be a big help. By consolidating your various debts into one single payment, you can make things more affordable and get back on track. However, it’s important to know that not all debts can be consolidated.
Types Of Debt You Can Consolidate
When you take a closer look at how to get a debt consolidation loan you’ll see that actually is a great way to save money on interest and get out of debt faster. However, not all debts are eligible for consolidation. In this blog post, we’ll discuss three types of debt that you can consolidate to save money.
Student Loans
Making just one payment to your loan servicer each month might not be enough to cover all of your student loan accounts. Each time you received a new disbursement of funds during college, a new loan was opened in your name. This could result in multiple student loan accounts appearing on your credit report.
As tuition costs continue to rise, more and more students are taking out loans to help cover their expenses. It’s not uncommon for students to have eight or more loans by the time they finish their undergraduate degree. Taking out loans can be a helpful way to pay for college, but it’s important to remember that you will need to repay your loans after graduation.
There are benefits and drawbacks to consolidating your student loans. If you consolidate your federal student loans using a private lender, you may lose certain benefits like income-based repayment. It may be worth keeping your federal loans separate and only consolidating your private student loans.
Financial Benefits
Student loan debt can be a huge burden, but consolidating your loans can provide some much-needed financial relief. Interest charges can add up over time, making it difficult to keep up with your payments.
Interest Rate Going Lower
By consolidating your loans, you may be able to secure a lower interest rate, which could lead to big savings over the life of your loan.
Credit Score
One of the key factors that can affect your credit score is the number of accounts with balances on your report. Though this may not be a major scoring factor, it can still have an impact on your credit scores. Therefore, it’s important to keep track of these accounts and ensure that they are kept in good standing. Debt consolidation loans can be a great way to get your finances in order, but have you wondered, is debt consolidation harmful to your credit?
Something you can do is reduce the number of accounts with outstanding balances. Your score might not go up by a lot, but even a few points can make a difference. So it’s worth taking this step if you’re trying to improve your credit.
What would happen if you got sick or injured and had to miss work? You might not be able to afford to pay your student loan servicer. However, even though you’re only making one payment, that payment is actually divided between six accounts. The late payment wouldn’t just show up on your credit reports; it could be reported on six different accounts.
Personal Loans With High-Interest
To consolidate your debts and simplify your finances, you may want to consider consolidating your high-interest personal loans. This can help you get out of debt quicker and make managing your money easier, some people may find that other debt management tactics are a better fit for their needs. Depending on your financial situation, if you live you may want to consider alternatives for a debt consolidation loan, click here.
Financial Benefits
If you have good or excellent credit, you can get a personal loan with a very competitive interest rate. However, if your credit score is lower, you will probably have to pay a much higher rate, which will increase your monthly payment.
Interest Saving
Save money on interest by securing a new loan with a lower APR. Your credit may have improved or interest rates may be lower than when you first took out your loan(s).
Credit Score
Personal loans can be a great way to consolidate debt and save money on interest payments. However, because personal loans are installment accounts, not revolving, consolidating these loans into a new personal loan won’t lower your credit utilization rate. Consolidation loans are a great way to get out of debt, but what if you have bad credit?
There is a potential for your scores to improve if you have fewer accounts with balances. Although, there may be a negative impact on your score due to the credit inquiry and new account appearing on your report.
Credit Card Debt
It’s important to be smart about your finances and one way to do that is by paying off your credit card balance each month. This eliminates the need to pay interest, reduces debt, and keeps your credit score healthy.
Debt doesn’t have to be a fact of life. You can create a plan to pay off credit card debt, and debt consolidation loans could help you achieve your goal more quickly.
Financial Benefits
Americans believe that a debt consolidation loan is often thought of as a way to pay off smaller, more manageable debts first. However, it may make more financial sense to tackle your most expensive debts first.
Saving On Costs
For example, let’s say you have $10,000 in debt with an APR of 16%. If you do debt consolidation to that debt with a new 24-month personal loan at 7.5%, you could potentially save hundreds of dollars in interest charges:
- Around $1,100 in interest fees
- Around $60 per month
Paying Off Faster
You could be debt-free within two years. That’s a win-win situation for your finances.
Credit Score
If you have balances on your credit cards, your credit score may be lowered. Lenders look at your revolving utilization ratio, which is the percentage of your credit limit that you’re using when considering you for a loan.
Credit utilization is the percentage of your credit limit that you use. The higher your credit utilization, the worse it is for your credit score. Therefore, it’s important to keep your credit utilization low in order to maintain a good credit score.
Paying off your credit card balance with a consolidation loan can help improve your credit score. This is because it lowers your credit utilization ratio, which is the percentage of your total credit limit that you are using. A lower ratio typically means a better credit score.
Personal loans are typically installment accounts, which are paid off each month over a specified period of time. Installment loans are treated differently by credit scoring models, so they won’t have as much of an impact on your score.
There are a few ways to consolidate your credit card debt and one of them is by using a balance transfer credit card. If you qualify for an offer with a low or 0 percent interest rate, you can save on interest payments for six, 12, or even up to 24 months. However, keep in mind that your new balance transfer card is still a revolving account so you probably won’t see as much of a credit score benefit if you go this route.
Other benefits that you should also consider:
- Total debt reduced quickly.
- A new account added to your report boosts your payment history.
Closing View
Debt consolidation can help you lower your interest rates and monthly payments, as well as streamline the repayment process. This can make it easier to manage your outstanding debt obligations and improve your credit and overall financial health.
Consolidation loans can be a helpful way to get your finances in order, but it’s not right for everyone. It’s important to understand how debt consolidation works and what types of debts can be consolidated. Additionally, it’s helpful to look at your budget and spending habits to make sure that consolidating won’t lead to more debt in the future.
