Consolidating debt can help you lower interest paid on loans and manage finances. Learn about the benefits of debt consolidation with Fifth Third Bank.
Financial matters, and especially debt, cause many people a significant amount of stress. In a survey by the American Institute of CPAs, 56% of Americans with debt say that it has negatively impacted their lives, while 28% say it caused them to stress about everyday financial decisions.
Striving to limit debt accumulation is always a worthy goal. However, if you already find yourself managing a large amount of debt, including credit cards, auto loans, student loans and more, consolidating it can reduce the mental burden and alleviate some anxiety.
What is Debt Consolidation?
Debt consolidation refers to the process of headquartering all of your debt under one loan. The loan vehicles for doing this may vary. Major banks offer such loans, as do debt consolidation companies. Offers from the latter may be appealing, but do your homework; these companies are the source of many consumer complaints and people can end up paying much more than they anticipated.
You can also transfer your debt to a single, low-rate credit card, leverage a home equity loan or line of credit or even borrow from your retirement accounts. Each method has its pros and cons, but the bottom line is that you should aim to simplify your payments, lower your interest rate and establish a straight path toward paying down your debt.
The Advantages of Consolidating Your Debt
Done smartly, consolidating your debt can offer many benefits. These include:
- Lower interest rates. Ideally, whatever vehicle you roll your debt into provides an overall lower interest rate than you're currently paying. For example, you may be able to roll some high-interest credit card debt into a much lower interest home equity line of credit.
- Reduced monthly payments. Lower interest will help you pay less over time and can also reduce your monthly payment. That's especially helpful if your debt payments have become unsustainable. However, in some cases a lower interest rate may combine with a longer term on the loan. This needs to be a strategic trade-off because the longer term of the loan likely means you'll end up paying more over the life of the loan.
- Simplified debt management. Making one payment each month, instead of several, streamlines your finances and makes it easier to track your progress. You might also find that your personal finances become less stressful as you pay down one balance, and receive fewer notices or bills that are set to come due.
- Fewer late fees. If you were struggling to decide between which debt payments to make each month, you may have incurred some late fees. Such fees can add up, creating not only more anxiety around your debt but also increasing the amount of money you owe. By consolidating your debt, you should be able to find a payment amount that works for you and pay it each month.
- Improved your credit score. This is more of a long-term benefit, but one worth considering. Methodically paying down your debt and reducing your late payments is the kind of financial behavior that positively impacts your credit score. Stay the course with paying down your consolidated debt and your score should rise in the process.
Having debt is common—and so is the stress of managing it. You can reduce both with a consolidation plan aimed at decreasing your interest rate and your monthly payment and making it easier to pay down what you owe.