Tired of making multiple credit repayments every month? Maybe the high interest rates on your loans are drilling a hole in your wallet, causing financial stress. Debt consolidation is an excellent way to take some burden off your shoulders.
It is a process of rolling multiple debts into a new loan. You can either take out a new personal loan or balance transfer to a new credit card. The aim is to reduce your interest rates and lower your monthly payments. That said, how exactly should you use a consolidation loan?
This guide unpacks some strategies for using a consolidated loan to manage debts.
Calculate Your Total Debt
First things first, add up all the money you owe on credit cards, personal loans, and other lines of credit. You need to have a clear understanding of your financial situation. Once you know how much you owe, find lenders who can give you a near figure.
Pro tip? Understand all costs of loan consolidation. This includes any fees, such as origination fees or early repayment penalties on your existing debts. Factoring these into your calculations will ensure the consolidation is truly cost-effective.
Pay Off All Existing Debts
Once you’ve rolled all your existing accounts into one and acquired a consolidation loan, pay off all existing debts immediately. You can do this yourself or have your lender do it. The latter method can yield a further discount on the rate.
Close Old Accounts
While this step isn’t mandatory, it can reduce financial stress in the long run. Consider closing all the credit card accounts you’ve already paid off. This might reduce the temptation to use them again.
Closing old accounts might impact your credit history length, but the overall goal should be avoiding debt in the future.
Make Timely Consolidation Loan Payments
If you’ve taken out a new personal loan for consolidation, determine how you’re going to pay it off. Make your single, new monthly payment on time. Create a budget to stay on track and have financial transparency every step of the way.
Avoid New Debt
This is super important. The entire point of a consolidation loan is to get out of debt, not just move it around. A consolidation loan must bring a lifestyle shift, encouraging you to make wise money decisions.
Avoid taking on new loans or running up credit card balances until your consolidation loan is fully repaid.
Make Extra Payments
Yes, a consolidation loan offers a lower rate than your existing credit accounts. But the total interest you pay may be higher if you keep the loan for a much longer period. This is why it’s important to make additional payments whenever you can.
Pay more than the monthly minimum payment and become debt-free. Reliable lenders like SoFi impose no repayment fees.
Track Progress
Lastly, regularly track your balance and review your budget to track your progress. Assess your spending habits to see if you can cut expenses and make increased payments towards your consolidation loan.
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