Debt consolidation is a common way to help manage bills and growing debt. It allows you to take control when you feel your financial situation is getting out of hand. The strategy works best if you have multiple debts spread out over credit cards, lines of credit and personal loans.
The idea behind bill consolidation is simple: you consolidate all of your debts, with different balances, different interest rates and payment due dates into one loan with one predictable payment.
With a debt consolidation loan, you get:
- One interest rate
- Payments personalized to fit your budget
- A date when you can plan to start living debt free
- The simplicity of only one payment, instead of several with various due dates
- Predictable payments to help you stay organized
Plus, every payment that you make reduces your overall debt load because you are not adding more debt as you go.
Other benefits of a debt consolidation loan
1. Pay off your debt faster
If you start making more money or have extra savings from time to time, you can use that cash to make lump-sum payments to pay off your loan faster. Be sure to confirm with the lender that there are no fees or penalties attached to paying off the loan ahead of schedule.
2. Rebuild your credit
When you take out a debt consolidation loan, your lender will need to do a credit check. Initially, this could impact your credit score. However, every on-time payment helps you qualify for better interest rates, rebuilds your credit, and can improve your credit score.
Understanding credit utilization
Credit rating agencies look at something called your credit utilization. It’s a fancy way of asking, “How much of your available revolving credit are you currently using?” Revolving credit refers to credit cards and lines of credits. It does not include other debts like installment loans or auto loans.
A low credit utilization rate (lower than 10 per cent) is good because it demonstrates that you are managing your debt well and not running close to your credit limit every month.
When you pay off your credit cards and lines of credit with a debt consolidation installment loan, you no longer have revolving credit. That can start to boost your credit score.
Tips for staying in control and improving your credit
A debt consolidation loan can only help you improve your credit and eliminate your debts if you are committed to making every payment and you avoid running up more debt on your credit cards or lines of credit.
Here are three ways you can manage your new loan and reach your goal of living debt-free:
1. Make every payment on time
Every on-time payment helps to establish a pattern of good money management. Over time, your track record will start to pay off. Most lenders will reward on-time payments with an improved interest rate.
2. Personalize your loan
How much you borrow and how long you take to pay it off are two things that determine the amount of your loan payment. A loan specialist can help you determine an amount you can comfortably afford and show you how the length of your term affects each payment.
For example, payments on a 60-month loan might be higher than payments on an 84-month loan but you pay less interest on the shorter loan. Experiment for yourself using our loan calculator.
3. Take advantage of flexible payment options
Most loans will give you a choice of weekly, biweekly, bi-monthly or monthly payments. You may find it easier to keep up with payments if you time them with your paycheque or other sources of income. Also, look for a lender that will let you make lump-sum payments with no fees or penalties as this can help you to pay down your loan faster.
If you think a debt consolidation loan will give you the financial relief you need to help you pay down debt and become debt-free, check out the 4 Steps to Debt Consolidation or visit the easyfinancial.com to start your online loan application and get started on a path to a better tomorrow, today.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.