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If you’re struggling to repay your debts, a debt consolidation loan could make good financial sense. Repaying your debts is an essential part of living a healthy financial life. Applying for debt consolidation can help you repay outstanding bills and reduce your monthly payments.

A debt consolidation lender helps borrowers to consolidate many debts, including high-interest credit card, medical bill, or personal loan accounts. Instead of paying each lender each month, you make a single, fixed-rate monthly installment on the consolidation loan for a certain period of time. Most debt consolidation loans have a two – five-year term, according to the Time Magazine. The interest rate charged by the lender on a debt consolidation loan depends on your creditworthiness. In most cases, the loan interest rate doesn’t change over the debt consolidation loan term.

Debt Consolidation Loan Strategy

Applying for a debt consolidation loan can help you manage multiple payments. Taking out a loan can stretch the money you have each month a little further. Use a debt consolidation loan calculator to analyze your debts and overall cost of borrowing. The debt consolidation loan may cost less or more than your current bills. Ask the following questions to review any consolidation loan offer:

  • Will the lender’s fees substantially add to my borrowing cost or am I saving money with a lower APR?
  • Can I pay more than the lender’s fixed monthly payment to pay off the loan faster? Does the lender allow flexible payments?
  • Does the lender allow for a co-signer with better credit to reduce my consolidation loan interest rate?

Look for debt consolidation lenders that do not charge origination fees and/or allow you to apply with a co-signer. Calculate the average annual percentage rate (APR) on your outstanding debts to determine how much money you can save with a debt consolidation loan.

Becoming Debt Free

If you’re drowning in debt, every penny matters. For instance, John owes USD 25,000 on a dozen credit cards. The minimum payments needed to service the outstanding debt quickly cut into John’s ability to pay the mortgage and buy food. In John’s case, the decision to consolidate his credit card bills into a personal debt consolidation loan helped him to get debt-free.

After John used the debt consolidation loan to repay his credit cards, he simply focused on paying a single loan. He opted for a five-year fixed rate loan and locked in a lower APR on the total debt owed. His lender offered flexible payments, so John repaid the debt consolidation loan in just four years or 48 months.

A debt consolidation loan can help you become debt-free, but it’s important to consider the following at the start.

Tip 1: Consider Borrowing Cost

Interest rates and the cost of money may be an obvious motivator to apply for a debt consolidation loan. It’s critical to reduce APRs on high-interest debt, such as credit cards or retail store cards, and reduce your interest rate.

Ideally, the debt consolidation loan eliminates a significant sum in future interest payments.

Tip 2: Simplify Payments and Improve Cash Flow

However, simplifying your payments is another important reason to consolidate debt. If you’ve got a dozen credit cards like John, it’s more challenging to know when each payment is due and how much is owed to each lender. Late payments and additional fees can result from confusion about payments, especially when credit lines are at or approaching maximum limits.

Consolidation of debts with a debt consolidation loan can make it easier to manage debt. Staying on top of multiple loans and/or debts can make it difficult to manage a declining monthly income. More income is required over time to pay monthly bills because interest applied and over-limit fees enter the picture.

Tip #3: Fixed Rates and Flexible Terms

When interest rates are at or near historical lows, it’s probably beneficial to lock-in a fixed rate on a debt consolidation loan. An open-ended credit line or bank facility can help the borrower rationalize there’s less immediate need to repay the loan.

In comparison, a fixed payment and loan term provides a certain goal. You’ll know the monthly payment, when the payment is due, and how many months to go before you’re debt-free.

A flexible loan can also simplify your life. Let’s say you receive a significant part of your annual income in a bonus each December. If your lender allows flexible repayments, you can make decisions to pay off the debt consolidation loan faster.