Finances

Debt consolidation loans still make sense today

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This guide outlines how and why debt consolidation loans can get you out of debt more efficiently.

If you’re in search of a way to improve your finances in 2022, debt consolidation is worth considering. It can allow you to roll multiple debts into a single debt with one, manageable payment. Not only can debt consolidation make the debt payoff process easier, it may also save you some money in interest. Here’s what you need to know about debt consolidation.

How debt consolidation loans work

If you’d like to consolidate debt with a debt consolidation loan, you’ll apply for a personal loan, credit card balance transfer, home equity loan, or another consolidation product. Let’s say you go with a personal loan. In this case, the lender will either repay your debts directly or you’ll take the loan proceeds and pay off your balances on your own.

Once you’ve paid off those debts, you’ll pay back your personal loan via fixed monthly payments. You’ll no longer have to worry about several debts with multiple payments and might even land a lower interest rate, which can save money over the life of the loan. But be aware that origination fees and taking a longer repayment term could increase the total cost of repayment.

Debt consolidation methods

There are a number of ways to consolidate debt, including:

Debt consolidation loans

We mentioned debt consolidation loans in the example above. Put simply, it’s a personal loan you can use to lower your interest rate, improve loan terms, and simplify payments. You can find debt consolidation loans at banks, credit unions, and branch-based and online lenders.

Credit card balance transfer

With a credit card balance transfer, you open a new credit card or receive a check from your existing credit card, ideally with a low introductory APR offer, sometimes even 0%. Then, you transfer your existing debts onto the new card. You’ll only have to make one payment and if you repay your balance before the intro offer comes to an end, you’ll save on interest. Be mindful that your interest rate could be high once the introductory period is over.

Home equity loan

When you consolidate debt through a home equity loan, you take out a new loan that’s secured by the equity in your home. You’ll receive a lump sum of money upfront, which you can use to repay your existing debts. Since a home equity loan is tied to your home, you may be eligible for a lower interest rate than you would with a debt consolidation loan. But if you default on your payments, the lender will have the right to foreclose your home.

Bottom line

If you’d like to improve your finances this year, debt consolidation loans may make sense. The ideal method for you will depend on your unique needs and preferences. Be sure to consider all of your options and weigh the pros and cons of each before you move forward.

Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of [publisher] or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. 

Photo by Karolina Grabowska

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