Why Do People Get Debt Consolidation Loans?

Banks, credit unions and finance companies offer debt consolidation loans that help people pay off their outstanding debt. A debt consolidation loan is a loan that combines all of your debt into one big loan, simplifying the process of repaying said debt. There are many reasons one may apply for this kind of loan, which we will explain in this article.

Reducing Debt Interest

One of the most common reasons people will apply for consolidation loans is that they can help reduce their overall interest. When one loan has a lower interest rate than the remaining portion of one’s debt, it makes sense to consolidate the debt, which will, in return, save you money.

Consolidating debt when possible is recommended as it can be expensive to pay high-interest debt costs. Usually, consumers opt for consolidation loans to help them pay off credit card debt as they often come with high-interest rates.

Note: Your credit score will affect the interest rate that you qualify for.

Paying Just One Monthly Payment

People in debt do not only use debt consolidation loans! Many people take advantage of combining all their monthly payments into one monthly payment that debt consolidation loans have to offer.

When you combine all of your monthly expenses into one payment, you can spend less time managing the payments you need to make each month, and instead, you can simply prepare to make one payment per month that covers all of your debt and monthly payments.

For someone with limited time or that is tired of trying to keep their debts organized, a debt consolidation loan can undoubtedly benefit them.

Increasing Credit Score

Although unexpected, you can increase your credit score with a debt consolidation loan. However, this only applies to those using a debt consolidation loan for credit card debt.

The primary reason for this is the credit utilization ratio. As one may guess, the credit utilization ratio measures the ratio between the balance on your credit cards and the set credit limits. Keeping your credit utilization as low as possible, preferably below 30%, will boost your credit score.

How does a debt consolidation loan help keep your credit utilization low? It’s relatively simple! Debt consolidation loans will help you pay off your credit cards, thus, reducing the percentage of debt on your credit limit.

Fixing a Time Frame To Pay Off Debt

One of the biggest problems that credit card holders face is that their debt continues to grow due to how open-ended credit card debt is. Often, the amount of time you can take to pay off your debt is relatively free. In some cases, you can take more than a decade to pay off debt, causing your debt to continue accumulating.

While most people would see it as an advantage to take as long as needed to pay off debt, it is counter-effective for many. Without a set time frame to pay off debt, one may continue spending without worrying about paying their debt as much as they would if they knew when they had to pay off debt. Thankfully, with debt consolidation loans, you are required to pay off the amount borrowed within a specific amount of time. This way, your debt will not continue growing, and you will feel the need to ensure you can pay off the debt before the deadline.

Reducing Monthly Payments

If you cannot keep up with your monthly payments, a debt consolidation loan may be the best option for you. While debt consolidation loans cannot magically make your expenses disappear, they can help reduce stress and give you more time to pay your bills.

With debt consolidation loans, you can enjoy more control over the amount you pay in monthly payments. If you find that your current monthly payments are not working for you, you can consider a longer loan that will allow you to pay off this debt over a more extended period.

It is important to note that you will have to pay more in total with longer debt consolidation loans due to the higher interest rate, but it will be worth it if it helps you keep up with your monthly bills and payments.

Conclusion

At the end of the day, there are several reasons a debt consolidation loan might be beneficial for someone. From reducing debt interest, combining monthly payments into one, improving credit score, setting a fixed time frame to pay off a debt to reduce monthly payments, debt consolidation loans can help people in all kinds of situations. 

If you want to learn more about debt consolidation loans, be sure to read some other articles on our website.

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