How does debt consolidation help you pay off your debt sooner?

Having multiple sources of debt can feel overwhelming. Debt consolidation can help you simplify the repayment process, reduce total interest costs, and get out of debt sooner.

Keep reading to learn how debt consolidation works, and its benefits and drawbacks.

• How does debt consolidation work?
• Benefits of debt consolidation
• Drawbacks of debt consolidation
• How does debt consolidation help you meet your payoff goals?

How does debt consolidation work?

Debt consolidation involves taking out a new personal loan to replace multiple high-interest debts, like credit cards. Debt consolidation loans are installment loans, so you’ll receive a lump sum up front and then make fixed monthly payments for the life of the loan.

When you consolidate debt, you can streamline your debt repayment because you’ll only have one loan to focus on and one due date to keep track of. Ideally, your debt consolidation loan will have a lower interest rate than what you were paying on your existing debts. This way, you’ll spend less money on interest charges — which means your monthly payments will be lower — and you can pay off debt sooner.

Benefits of debt consolidation

Why would you bother with debt consolidation instead of simply focusing on your current debt payments? Here’s a closer look at some debt consolidation benefits:

• Could get a lower interest rate — When you’re looking for a debt consolidation loan, try to find a lender who will offer you a lower interest rate than you’re currently paying on your debt. That way, you can spend less money on interest and pay off your debt sooner. For example, credit card interest rates are typically much higher than personal loan rates, so consolidating multiple credit card balances into a single personal loan could yield big savings.
• Lower monthly payments — If you get a lower interest rate, your monthly payment amount will likely be lower. This may leave room in your budget to make extra payments toward your debt.
• Streamlined repayment process — Instead of having to keep track of the progress you’re making on multiple debts, once you consolidate your debt you’ll only have one loan payment to make each month with one lender.

Drawbacks of debt consolidation

Debt consolidation also has some drawbacks worth considering before deciding if it’s the right move for you:

• May not qualify — If your credit score has dropped since you took out your original debts, or if your debt-to-income ratio is too high, you might not qualify for a new debt consolidation loan. But adding a cosigner with good credit can increase your chances of approval.
• Lower interest rate isn’t a guarantee — While debt consolidation streamlines the debt repayment process, there’s no guarantee you’ll be offered a lower interest rate. If you don’t have good credit you may even be offered a higher interest rate, which could make it more expensive and difficult to pay off the debt.
• Can temporarily hurt your credit score — When you apply for new credit products, such as a debt consolidation loan, you’ll end up with a hard inquiry on your credit report. This can temporarily lower your credit score by a few points. Opening a new credit account can also lower your average account age, which can also negatively affect your score. But keep in mind this dip is temporary, and making on-time payments on your new loan can help improve your credit over time.

How does debt consolidation help you meet your payoff goals?

The main benefit of debt consolidation occurs when you qualify for a lower interest rate than you’re currently paying. The less interest you pay, the more money you can spend paying down your principal balance. If you can pay down your loan balance ahead of schedule, you can save even more on interest. A lower interest rate saves you money, but making extra payments toward your debt in order to pay it off early will help you save even more.

It’s also possible to choose a shorter loan term when you consolidate debt. This can lead to higher monthly payments, but you’ll likely receive a lower interest rate and pay off your debt faster.

Debt consolidation also streamlines the repayment process. Having multiple sources of debt with different lenders, due dates, and interest rates can be a bit overwhelming. By having just one loan to focus on repaying, you may find it easier to make a clear plan for debt repayment and focus on making progress toward paying off your debt.