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Debt consolidation: What it means and when you should do it

Debt has a way of sneakily stacking up. Monthly payments on one card, groceries on another, once-in-a-while splurges on a third... and sometimes you forget about that “just for emergencies” credit card that somehow keeps picking up charges. 

Maybe you have a personal loan or two adding to the background noise as well. 

Paying down one loan can be complicated enough. When you're juggling multiple repayment schedules with different interest rates and due dates, your debt situation can build into a major headache very easily. 

If this sounds familiar (or triggers painful memories of past-due notices), you may want to look into using a personal loan for debt consolidation: a way to simplify your payments, gain more control over repayment terms, and, in many cases, save money. 

Here’s a quick primer on what debt consolidation is, and when it might be the right solution for you. 

 

What is debt consolidation and how does it work? 

In a nutshell, debt consolidation involves taking out a new loan to pay off one or more existing loans. The new loan can come from the same source as the old loan, or from a different financial institution. 

The big idea is to streamline multiple existing loans into a single monthly bill. Often you’ll be getting a better interest rate and a clearer repayment schedule as part of the deal. 

Just like there are different types of loans, there are different types of debt consolidation, which is also sometimes called refinancing. Some debt consolidation loans are backed by assets, like a car or home. Some work differently depending on what the pre-existing loan or loans are covering — student loans have their own special rules for consolidation, for example. 

 

Roll multiple bills into one. 

One familiar reason to take out a personal loan to consolidate debt is the one mentioned up top: too many credit cards, too many bills! 

If you have three or four (or more) cards covering different purchases, charging you different interest rates, billing you at different times, and contacting you in different ways, it's easy to lose track. (That’s how your credit card issuer makes its money, in fact.) 

There are a few variables to work out in this scenario, but long story short, a debt consolidation loan folds all of those credit cards debts into one, with one interest rate, and one monthly payment. 

Let’s say you have $8,000 in debt across three cards. Rather than keeping track of separate monthly minimums and hoping you don’t forget to pay down each card on time every month, you’d take out a single loan for $8,000 from a lender and pay off the debt for all three credit cards. Now you owe that one lender the $8,000 you previously owed three separate credit card companies. 

 

Adjust your rate and repayment schedule to meet changing needs. 

Besides simplifying your billing situation, debt consolidation often involves paying a lower interest rate than you are with multiple high-interest credit cards and loans on your plate. 

Maybe you aren't overwhelmed by too many credit cards, but would like to renegotiate one or two major loans because your circumstances have changed. Let’s say you’ve spent a few years tightening your belt, conscientiously building credit and savings. You finally feel like you're getting a better grip on your finances, and don’t want the missteps of your 20s to spill into your 30s. (Or 40s, or 50s... there’s never a bad time to start on the path towards financial freedom!) 

Armed with a better credit score, you want to revisit the less-than-ideal repayment terms on an existing loan. A debt consolidation loan in this situation basically means converting a higher-interest loan into a lower-interest loan — meaning less money out of your pocket over the entire life of the loan. 

Debt consolidation loans also allow greater control over your repayment schedule. Some people consolidate to lower their monthly payment. Others opt to pay more each month, at a lower interest rate, in order to get out of debt faster and pay less on the loan overall. 

 

When should you take out a personal debt consolidation loan? 

Debt consolidation loans work well for people with one or more existing loans that they want to refinance in order to pay a lower interest rate, lower their monthly payment, or both. Some people need simplicity: turning many debts into one. Some are going for flexibility: altering the terms to make monthly payments more comfortable. Many people are enticed by the simple prospect of saving money over time. 

Kasasa Loan will give you total control over these variables, and help you borrow smarter instead of racking up more high-interest debt when it can be avoided. You don’t get charged any fees, and our unique Take-Back™ feature lets you reclaim money you’ve already paid toward your loan, giving you access to funds when you need them most. A Kasasa personal loan for debt consolidation empowers you to take control of your debt.  

As with any loan, the terms will depend on your credit history and other factors, like employment situation and total debt picture. The why of a debt consolidation loan is to reduce the total amount you’ll pay back, or to simplify repayment. The when depends on you. If you’re overwhelmed by too many credit card bills, or if you’ve recently had a life change that makes it easier to pay off your past loans, debt consolidation might be the right next move for you. 

You can learn more about using a Kasasa Loan for debt consolidation here.

Tags: Personal Finance, Debt