You’ve probably heard of a debt consolidation loan, but you might be wondering what it is, and if it’s the right option for you. Basically, it’s a financial strategy that can help you manage your debts more effectively by rolling them into one single, more manageable payment. It can be a good option if you’re dealing with high-interest debts, like credit card balances, personal loans, or medical bills. If you’re wondering if debt consolidation is the right approach to get control of your finances, here are some of the benefits and drawbacks you should consider.

How does debt consolidation work?

Debt consolidation involves taking out a new loan or using a balance transfer credit card to pay off your existing debts. This process simplifies your debt repayment by consolidating multiple debts into one single payment. The new loan typically has a lower interest rate, making it easier to manage your debt and potentially reducing the overall cost of repayment.

A debt consolidation loan might be for you if you have

1. Multiple debts

If you have multiple debts to manage, debt consolidation makes it easier by combining all of your debts into one monthly payment, making it easier to keep track of your payment.

2. High-interest loans or credit card debt

A lot of debt consolidation loans come with lower interest rates compared to credit cards or other high-interest loans. So if you have high-interest debt, this can save you a lot over the life of the loan.

3. High monthly payments

Depending on the terms of your debt consolidation, you may be able to reduce your monthly payments. This can free up extra money in your budget for other essential expenses or savings.

4. A credit score that could use some work

If you consistently make on-time payments on your new debt consolidation loan, it can have a positive impact on your credit score. Timely payments demonstrate responsible financial behavior to creditors.

Debt consolidation loans: the not-so-good

While debt consolidation can be a useful approach, it’s important to consider the reasons it may not be the right option for you:

1. You want to repay your debts sooner

A debt consolidation loan with lower monthly payments can extend the overall time it will take you to repay your debt. So it reduces the immediate burden, but you may end up paying more in interest over the long term.

2. You don’t meet the requirements to qualify

Not everyone can qualify for a debt consolidation loan. Lenders usually consider your credit score, income, and other factors when they’re deciding whether to lend to you.

3. You don’t want to get saddled with extra fees

Some debt consolidation loans come with origination fees, which can add to the overall cost of the loan. Be very careful to make sure you know all fees you’ll be paying for the loan before you commit.

4. You’re at risk for accumulating new debt

Consolidating your existing debts doesn’t protect you from overspending or mismanaging money. If you keep racking up new debts after you get a debt consolidation loan, you could find yourself in a worse financial situation—so it’s important to be committed to changing these behaviors.

Steps to consider

Before you decide to move forward with debt consolidation, here are some steps you should take.

1. Assess your debts

Create a complete list of all your outstanding debts, including their interest rates, monthly payments, and due dates. This helps you understand the total amount you owe and the terms of your current debts.

2. Explore your options

Research all of your debt consolidation options, like personal loans, balance transfer credit cards, or home equity (HELOC) loans. Compare interest rates, fees, and repayment terms to find the option that is the best fit for your financial situation.

3. Check your credit

Your credit score plays a big role in determining your eligibility for a debt consolidation loan and the interest rate you can get. Review your credit report and take steps to improve your credit score if necessary.

4. Create a budget

A budget is critical for managing your finances and ensuring you can make consistent, on-time payments on your new debt consolidation loan. Include your monthly loan payment in your budget and stick to it.

5. Avoid new debt

Once you’ve consolidated your debts, it’s very important to avoid accumulating new debt. Focus on responsible financial habits, including tracking your spending, living within your means, and building an emergency fund.

Debt consolidation: the bottom line

Debt consolidation can be a valuable tool if you’re looking to simplify your debt repayment and possibly even reduce your overall interest costs. But you need to carefully consider your financial situation, explore your options, and be aware of the benefits and potential drawbacks to debt consolidation. With the right planning, developing responsible spending habits, and a commitment to managing your debts, debt consolidation can be a useful step toward a debt-free future. If you find yourself in need of a little extra cash to help you make a payment, you can always use Brigit’s Instant Cash feature*.

*Not all members will qualify for advances; Depending on eligibility, advances range from $50 – $250. Subject to Brigit’s approval and policies.