A debt consolidation loan is designed to streamline multiple debts into one monthly payment. This can be a good option for those juggling multiple debts with different repayment dates, as it makes debt management easier and reduces the risk of missing payments. However, debt consolidation loans are not the only way to manage debts and may not be the most suitable option for you.
What is a debt consolidation loan?
Debt consolidation loans are designed to streamline multiple balances into one monthly payment – they make it easier to manage your debt and reduce the amount of interest you pay. Taking out a debt consolidation loan means that you transfer all your existing debts onto one loan, so there is only one payment to manage and only one interest rate.
One of the reasons people choose to take out a debt consolidation loan is that it can sometimes be cheaper.
Personal loans, including short-term loans and even longer-term loans, generally offer low interest rates, which means transferring all your debts into one loan payment could mean that you pay less interest per month, saving you money in the long run. However, the most favorable interest rates are generally reserved for those with good credit, which means that for borrowers whose credit is not perfect, it may not be cheaper to transfer their debt to a Personal loan.
If not, how could you consolidate your debts?
If you’re not sold on the idea of a debt consolidation loan, there are still many different options that might be a better option depending on your personal financial situation:
1. Pay off cards with the highest rate first
Before deciding which strategy to choose to pay off your debt, make sure you know exactly how much you owe and the interest rates for different types of debt. About 38% of American credit card holders are unaware of the interest rates associated with their credit cards (in the UK there are charities that can help you when you are in debt). The first step should always be to check out the different interest rates so you know which ones charge the highest interest, these should be the ones you pay off first in order to start managing your debt more effectively.
Once you have identified the cards with the highest interest, make the minimum payment required for each of your cards. Then any remaining money you have you can use to pay off the card with the highest interest rate. If you pay off your cards by APR order rather than by balance, it can help you get started with your debt management faster and could save you money.
2. Move your balance to 0% interest
If you have a good credit rating, moving your debt to a card with a 0% introductory rate might be a smart option. Some credit cards offer an introductory rate of 0% which can last for 12 to 18 months. If you choose this option, it means you can work on paying off your debt quickly without having to pay interest. Before doing this, you need to check if there are any fees charged for transferring to another card and how much those fees would be.
It should be noted that this is only a profitable method if you are able to pay off your entire balance before the end of the 0% introductory period, otherwise you may end up paying a large amount of interest.
3. Increase your minimum payment
Many cardholders make the required minimum payment per month in order to manage their credit card debt. While this avoids paying interest on the account, it does not help tackle your debt. However, if you are able to increase the minimum payment or double the minimum amount required, you could pay off your debt much faster.
4. Spend extra money on paying off your debt
Rather than paying off your credit card interest rates, it might be better to spend money on reducing the total value of your credit card debt. Even if you borrowed as little as $1,000 by credit card, paying off your debt sooner will save you money in the medium to long term, with less interest to pay. This will help you pay off your debts faster and get into the black sooner.