Finance

What Are the Benefits of a Debt Consolidation Loan?

Debt Consolidation

Anyone who’s tried to build a sandcastle at the beach too close to the shoreline knows how futile the activity can start to feel. Just as you’re feeling good about your structure, a wave comes in to wash it away.

Trying to pay down thousands of dollars in credit card debt can start to feel that way after a while, too. Fortunately, debt consolidation loans can offer a more efficient and cost-effective way to tackle debt.

What are some of the other benefits of taking on a debt consolidation loan?

Read on to learn more.

Streamlines Payments

This perk will appeal to you if keeping your statements straight and remembering to pay bills is one of your least favorite things to do. The purpose of taking out a consolidation loan is to use the funds to wipe out your outstanding credit card balances in one go. As long as you avoid racking up more credit card debt in the meantime, this means you’re free to focus on making a single loan repayment each month rather than managing multiple obligations.

Makes Payments More Predictable

Similarly, loan repayment occurs in fixed installments. You’ll know exactly how much you owe per month and when. This may be a relief after dealing with credit card debts on which you pay varying amounts each month, as the consistency makes it easier to budget accordingly.

Speeds Up Debt Repayment

As Bankrate notes, debt consolidation can help fast track complete debt repayment compared to making payments across credit cards. For instance, making near-minimum monthly payments on a multi-thousand dollar balance can stretch repayment of that debt across more than a decade when you factor in interest.

Debt consolidation loans offer a clear repayment timeline. Many consumers find this preferable than lingering credit card debt with no clear end in sight.

Reduces Interest Charges

Perhaps the biggest advantage of using a firm like bills.com for debt consolidation is the opportunity to get lower interest rates, which can reduce the amount borrowers end up paying over the life of the loan. However, it’s important to avoid lengthening the loan past the point at which paying the resulting interest will surpass what you’d pay on your credit cards.

Using a consolidation loan calculator online can help you compare the finer points of various loans before applying. Pre-qualifying for a loan will help you get an estimate based on your credit score for annual percentage rate (APR), loan term and monthly payments. Then you can compare these factors head-to-head between different loans before deciding on the best fit.

Improves Credit Scores

Borrowers struggling with credit card debt often experience high utilization rates, which can in turn hurt their credit ratings. High utilization rates — also known as using a large percentage of your available credit — signals lenders you’re burdened with debt, and therefore classified as riskier.

You should keep your credit accounts open after taking on a loan to preserve the longevity of your history and help keep your credit utilization ratio low. This can optimize your credit score. Making timely payments on your loan looks good on your credit report too.

Debt consolidation loans do present certain benefits to borrowers struggling with credit card debts. Knowing these pros, as well as the potential risks, will help you make a confident decision regarding eliminating your debts.

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