If you’re currently dealing with multiple loans from different loan providers then consolidating this debt can be a good option. A debt consolidation loan allows you to combine all your existing debts to provide you with one monthly repayment. This loan is used to pay off your individual loans, leaving you with one large loan instead. Consolidation loans are usually ideal for people who have multiple repayments to make on different credit cards, loans and overdrafts.
Here are some of the main reasons why taking out a debt consolidation loan can be a good idea and some of the things you should be wary of:
One monthly payment
It’s likely that your current payments are required on different days each month. This can be difficult to manage and often quite stressful. By consolidating your debt you can streamline everything into one single source and make just one payment each month. Having one payment can make managing your loans much easier. One fixed monthly payment can also help you to more easily budget for other things.
Lower interest rate
Using a debt consolidation loan can also help you to save money on interest. This is especially the case if you have several credit cards with high interest rates. If the rate of borrowing on a consolidation loan is lower than your original debt then you could reduce the amount of interest you pay on a monthly basis.
Improve your credit score
If you’ve fallen behind on any of your existing loan repayments then it’s likely your credit score has suffered. Taking out a consolidation loan can help to improve your credit score. This is because it gives you an opportunity to demonstrate that you’re a responsible borrower.
Things you should be aware of:
Even though a consolidation loan may save you money on a monthly basis, depending on the rate and term, you could be increasing the total amount you pay back and the duration of the repayments.
Another thing you should avoid doing is borrowing more than you need to. A debt consolidation loan should be a tool to consolidate your debt, rather than create more.