For someone who is struggling with heavy debt, consolidating may be a good idea. Having multiple credit cards, for example, means that the person is making several payments a month and having to pay interest on each card individually. This could mean hundreds more in interest over the life of the debt. The person is paying more each month than they would with other debt repayment options.
Consolidating a debt could be a good option for some people because it allows you to move all of your debt into one place. Instead of making multiple payments that might not even go towards the principal, you can make a single payment and pay one interest rate. There is usually a fee built into a consolidation loan, but it may be much less than you’d pay in interest for your debts separately combined with late fees.
How do you know if a consolidation loan is right for you?
Consolidation loans, usually in the form of personal loans, need to be approved by your bank in most cases. So, first, you will need to qualify. If your credit is still good, then this is possible and you may want to consider it.
Second, you should look at how much the interest will be on the loan. For example, if you can get an interest rate of 7% and have credit cards charging 30%, then switching those debts over to the loan makes perfect sense. You’ll save a significant amount of money in interest. It doesn’t make as much sense if the loan has a rate of 15% and your cards are at 16%.
Finally, make sure you’re saving money monthly. You want the payment to be less than you pay now to each card or debt while still paying down what you owe.
If avoiding bankruptcy with a consolidation loan isn’t right for you, then there are other options. Our site has more information.