Debt consolidation involves the combination of multiple debts into one larger loan. For example, you may be making payments for a student loan, a vehicle loan, credit card debt, and others. Instead of handling all these debts separately, you combine them into one monthly payment, often at a lower interest rate. Here are some of the advantages and disadvantages of consolidating your debts in this manner.

Schedule Payments Efficiently

When you opt for debt consolidation, you are relieved from the anxiety of remembering to make multiple payments on time every month. Instead, you have only one payment, always of the same amount, that you can budget for and mark on your calendar. People often end up paying off credit cards for years with no end in sight, but when you consolidate your debts, you know exactly when your payment is and how many you have yet to make.

Eliminate Debt More Quickly

As mentioned above, credit card debt can go on indefinitely, especially if you only make minimum payments. A debt consolidation loan eliminates credit card debt and replaces it with a fixed payment amount and a definite repayment period.

Pay Less Interest

Interest rates for credit cards are almost always significantly higher than those for personal loans. Debt consolidation allows you to pay off what you owe at lower rates of interest.

Improve Credit Score

As long as you make your debt consolidation loan payments on time, in the long run your credit score should go up as your payment history improves. Keep your credit cards open, though, so your credit score can benefit from the length of your credit history and your improved credit utilization ratio.

Consider the Drawbacks

Despite all these benefits, there are a few possible disadvantages to debt consolidation that you will want to consider. For instance, you may have to pay some upfront fees such as loan origination, balance transfer, annual, and closing fees. It is also important to remember that consolidating your debt alone will not work in the long term if you do not improve your spending habits. A combination of debt consolidation and a realistic budget is what works best.

For more advice on debt consolidation, contact KPI.