Debt can cause stress and interfere with a person’s ability to meet short and long-term financial goals. A debt consolidation loan can help. Such a loan may simplify the debt payoff process and potentially save money. Fortunately, installment loans – which are typically unsecured and offered by banks, credit unions, and online lenders – can be consolidated.
With a debt consolidation loan several debts are rolled into one, easy-to-manage payment. This type of loan eliminates the need to manage different payments, interest rates, payment dates, and payback periods. While several debt consolidation strategies are available, a debt consolidation loan is one of the most popular options.
When taking out a debt consolidation loan, a personal loan is used to combine multiple debts, ideally with a lower interest rate and more favorable terms. Often, the borrower will receive a lump sum to pay off their debts and will begin making just a single monthly payment on the new loan. However, in some cases, lenders will directly pay the borrower’s creditors.
Just like any financial strategy, debt consolidation comes with pros and cons, including:
The benefits of debt consolidation are:
The drawbacks of debt consolidation are:
Here are some other options for managing debt:
With the debt avalanche strategy, a person pays off their debts with the highest interest rates first so they can save the most money in interest over time.
Using the debt snowball strategy, the person pays off their smallest debt first and applies the payments they used toward that debt to pay for the next smallest debt. This strategy can help build momentum and increase motivation.
With a balance transfer credit card, a person can take their high-interest credit card balances and transfer them to a different credit card featuring a lower interest rate. Typically, this method of managing credit card debt is efficient because only a single payment is needed rather than separate payments to different credit card issuers at different times during every month.
Credit counseling involves choosing a credit counselor who can design an affordable monthly payment plan for the individual client. A credit counselor may be able to negotiate lower interest rates and credit counseling may protect the client from aggressive debt collectors and falling into delinquency.
Debt consolidation can take the hassle out of making regular debt payments on installment loans. Other debt payoff strategies include debt snowballing, debt avalanche, balance transfer credit cards, and credit counseling.
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