7 Key Benefits of Debt Consolidation
Updated On January 14, 2022
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There are at least 7 key benefits of debt consolidation. Debt consolidation is the process of paying off multiple types of debt with a new personal loan at a lower interest rate.
When you consolidate debt, you can use the proceeds from a personal loan to pay off each individual loan. Depending your lender, some lenders will pay off your old debt on your behalf, while other lenders may disburse the proceeds directly to you so you can pay off debt directly.
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Here are 7 key benefits of debt consolidation:
- Lower your interest rate
- Get a fixed interest rate
- Combine debt into a single loan
- Pay off debt faster
- Helps you get organized
- Get cash quickly
- Save money
Lower your interest rate
The biggest key benefit of debt consolidation is the ability to get a lower interest rate. When you consolidate debt, you may be able to get a lower interest rate.
Why? For example, your credit card debt may have an interest rate higher than 20%. If you want to pay off $10,000 of credit card, it could take several years and become very expensive with compounding interest. If you have good to excellent credit, you may be able to use a credit card consolidation loan, which is a type of personal loan, to get a lower interest rate compared to your credit card debt. A lower interest rate could not only help you save on interest, but also help you pay off debt faster.
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Get a fixed interest rate
Another key benefit of debt consolidation is the ability to get a fixed interest rate. For example, personal loans offer low fixed rates compared to interest rates on credit card debt. Borrowers with a higher credit score and income tend to get lower interest rates, although each borrower’s profile is unique.
With a personal loan, you can borrow from $1,000 to $100,000.
A fixed interest rate means your interest rate will never change while you pay off the personal loan. Fixed interest rates also are more predictable, so you will know exactly what you owe each month.
Combine debt into a single loan
The ability to combine debt into a single loan is a key advantage of debt consolidation. Debt consolidation enables you to combine multiple debts into a single loan such as a credit card consolidation loan, which is also known as a personal loan.
As a result, you won’t have to make multiple credit card payments with different interest rates each month to different credit card companies. Instead, you can make a single payment to one personal loan lender.
Pay off debt faster
Debt consolidation enables you to pay off debt faster. A personal loan typically can be repaid in one to seven years. Check with your lender to understand all your repayment options.
In contrast, credit card debt could take longer to pay off as interest compounds and if you make relatively smaller monthly payments. If paying off debt faster is your goal, you should opt for as short a personal loan repayment period as you can afford.
Helps you get organized
Debt consolidation is a helpful strategy to get organized. If you have multiple types of credit card, for example, it may be challenging to keep track of all your credit card payment, interest rates, and credit card companies.
Debt consolidation simplifies repayment to a single monthly payment, one interest rate and one personal loan company. This can keep you focused on your goal, which is debt repayment.
Get cash quickly
Debt consolidation can help you get cash quickly. Some personal loan lenders can fund your personal loan the same business day. Other personal loan lenders may take several days or a week to fund your personal loan.
Once you receive cash in your bank account, you can use the funds to pay off your old credit card debt, for example. In some cases, the lender may pay off your old debt directly.
The final key benefit of debt consolidation is the ability to save money. The primary goal of debt consolidation is to save money and get out of debt faster. To save more money, focus on your interest rate and your personal loan repayment period. A lower interest rate can help you save interest each month compared to high credit card interest.
Personal loans typically are repaid between one and seven years. If you can afford the monthly payments, it can be advantageous to choose a shorter repayment period.
A shorter personal loan repayment period will mean you can save more money on interest, but you will have a higher monthly payment. A longer personal loan repayment period will provide a lower monthly payment, but you will pay higher overall interest.
This credit card payoff calculator shows you how much you can save with debt consolidation.
Let’s assume you have one credit card with a $10,000 balance, a 25% interest rate, and a $300 monthly credit card payment. Let’s assume you have a second credit card with a $10,000 balance, 20% interest rate, and a $200 monthly payment. If you consolidate your credit card balance of $20,000 and weighted average interest rate of 22.50% with a new personal loan at an interest rate of 8%, then your total savings would be $15,291.