A debt consolidation loan can simplify that picture by combining multiple debts into one personal loan. Here's how the process works.
Step 1: Add Up the Debt You Want to Consolidate
Start by making a list of the balances you're considering paying off. For each account, write down:
- Current balance
- APR
- Minimum monthly payment
- Due date
Then calculate the total. If you have three credit cards with balances of $8,000, $5,000, and $4,000, for example, you're carrying $17,000 in credit-card debt.
Step 2: Explore Personal Loan Options
Next, determine whether you may qualify for a personal loan large enough to consolidate the balances.
Personal-loan rates and terms can vary considerably between lenders. Your available options may depend on factors such as:
- Credit history
- Credit score
- Income
- Existing debts
- Requested loan amount
- Repayment term
That is why comparing options matters.
Step 3: Compare the APR—Not Just the Payment
A lower payment can look attractive, but it doesn't necessarily mean you're saving money. Pay close attention to the APR.
APR provides a standardized way to compare the cost of borrowing and may incorporate certain fees in addition to interest. Also compare the total amount you'll repay over the entire loan term.
Step 4: Review the Repayment Term
Personal loans generally have a defined repayment period.
A shorter term usually means a larger monthly payment but potentially less total interest. A longer term can reduce the monthly payment but may increase the amount of interest paid over time.
The goal is to find a payment you can realistically afford without unnecessarily extending the debt.
Step 5: Use the Loan to Pay Off Your Debts
Once an approved loan is funded, you can use the proceeds to pay off the debts you're consolidating.
Instead of having several outstanding balances, you now have one installment loan. Depending on the lender and loan product, funds may be sent to you or, in some cases, directly toward creditors.
Step 6: Make One Scheduled Payment
Instead of keeping track of several credit-card due dates, you'll generally make one scheduled loan payment.
That simplicity is one of the biggest reasons consumers consider consolidation.
Step 7: Keep Your Credit Card Balances Under Control
This step is crucial. Debt consolidation moves debt—it doesn't erase it.
If you pay your cards off and then immediately start carrying large balances again, your financial situation could worsen. Consider creating a budget and deciding how you'll use your cards going forward before consolidating.
Benefits of Debt Consolidation
Depending on your situation, potential advantages include:
- One monthly payment
- Potentially lower APR
- Predictable payments
- Defined repayment schedule
- Easier budgeting
- Potential interest savings
When Debt Consolidation Might Not Make Sense
Consolidation may not be beneficial if:
- Your new APR is higher
- Fees eliminate your potential savings
- The payment doesn't fit your budget
- The repayment term is excessively long
- You plan to continue accumulating credit-card debt
Always look at the complete financial picture.