Questions to Ask Before You Consolidate Your Debt
Debt can be an obstacle to achieving your financial goals, especially if you’re paying high interest rates. Consolidating debt payments could help you to pay off what you owe faster and potentially save money on interest charges.
Debt consolidation allows you to combine multiple debts into one. Learn the most important questions to ask about debt consolidation to help decide if it’s right for you.
This approach may not be right for everyone, however. Before pursuing debt consolidation, it’s important to do your research first. Asking these 10 questions can help you weigh the pros and cons to decide if consolidating debts makes sense for you. Understanding the answers to these questions and why they are important can also help you avoid debt consolidation scams.
Top 10 Questions to Ask About Debt Consolidation
When you compare loans, ask these questions to make sure you’re getting the right loan to help you get on the right track
1. What is debt consolidation and how does it work?
Debt consolidation is a process that allows you to combine multiple debts into one. This typically involves taking out a personal loan or debt consolidation loan, then using the proceeds to pay off your debts. You’d then make one payment to the loan going forward.
Typically, debt consolidation loans are unsecured. That means no collateral is required to obtain one. But if you have poor credit, your borrowing options may be limited to secured loans instead.
2. Are there other ways to consolidate debt?
A home equity loan or home equity line of credit (HELOC) could be used to consolidate debt if you own a home. This kind of debt consolidation loan involves borrowing against your home equity. You might get a low rate with this option but the trade-off is you’re using your home as collateral for the loan.
If you’re combining credit card debts, a balance transfer is another option for debt consolidation. Instead of getting a personal loan, you’d open a new credit card account with a 0% annual percentage rate (APR), then transfer existing balances to it. You’d then make one payment toward that credit card each month.
3. What kind of debts can I consolidate?
Debt consolidation loans and personal loans for debt consolidation can be used to pay off a variety of bills, including:
- Credit cards
- Store credit balances (such as money owed to a furniture store or appliance store)
- Medical bills
- Past-due utility bills
- Auto loans
- Personal loans
Debt consolidation might be a good option if you primarily have these kinds of debts to pay off.
Generally, personal loan lenders won’t allow you to use debt consolidation loans for student debt. But you may be able to consolidate student loans through your lender, which could help to streamline your payments and potentially reduce your interest rates.
4. How much money do I need?
The amount of money you need to borrow for debt consolidation depends on how much debt you have and which ones you want to combine. An online debt consolidation calculator can help you come up with a realistic number.
This kind of calculator allows you to input your debt balances and interest rates to estimate how much you need to borrow and what your monthly payment might be. You may also be able to input different loan terms or interest rates to find a payment that fits your budget.
In terms of how much you can get for a personal loan, lenders can set minimum and maximum loan amounts. At the lower end, for example, the minimum may be $3,500 or $5,000. At the higher end, personal loans can max out at $50,000 or even $100,000 with certain lenders.
Compare loan amounts, rates, and more. See how lenders stack up:
5. How long will it take for me to pay this off?
The main goal of debt consolidation is to roll multiple debts into one so your monthly payments are easier to manage. How long it takes you to pay off a debt consolidation loan can depend on the terms.
Depending on the lender, you might be able to choose loan terms ranging from 12 to 60 months, though some might go even longer than that. When choosing a loan term for debt consolidation, ask yourself what’s more important: paying off the debt faster or getting a lower monthly payment.
A longer loan term can mean a lower payment but you might pay more in interest overall. Choosing a shorter loan term can get you out of debt faster and save you money on interest, but it’ll mean a larger monthly payment.
6. Will this save me money or cost me more in the long run?
Whether debt consolidation will save you money hinges primarily on the interest rate and loan term. If the interest rate you pay for a debt consolidation loan is less than the average interest rate you were paying across your debts previously, then you could save money.
But again, it’s important to consider how long you’ll be making payments to the loan. The longer it takes you to pay off the loan, the more the interest adds up. If the lender charges fees, that can add to the total cost.
This is why it’s so helpful to use a debt consolidation loan or installment loan calculator to estimate payments. You can also estimate the total interest paid over the life of the loan with different loan terms.
7. How will this affect my short- and long-term financial goals?
Debt can be a hurdle to achieving other financial goals, like building an emergency fund or saving for a down payment on a home. If you’re planning to consolidate debt, consider how much money you’ll pay each month and how much money you’ll have left over to save toward other goals.
For example, if you’re choosing a shorter loan term with a higher monthly payment will that mean temporarily putting the brakes on building your emergency fund? If so, how quickly would you be able to make up the difference once your debts are paid off?
If you opt for a longer loan term, how would that affect your ability to save for bigger goals, like retirement? Putting off saving for retirement could cost you thousands or even hundreds of thousands of dollars in missed interest growth. So it’s important to look at how well you’ll be able to balance debt consolidation with other goals.
8. Do I need money for anything else besides debt consolidation?
Personal loans, home equity loans, and HELOCs can be used for more than just consolidating debts. For example, you may want to make home improvements or borrow money to start a business. That can increase the amount you’ll need to borrow — and the amount you’ll pay interest on over time.
Taking out a larger loan isn’t necessarily a bad thing if you can afford the monthly payments and doing so won’t compromise your other financial goals. But it’s important to consider whether the cost of the loan is worth it.
For example, if you’re taking out a larger loan to pay off debt and renovate your home, will those renovations boost your home value enough to justify the interest you paid? Looking at the bigger picture can help you figure out what you might gain from getting a larger loan.
9. Will this help me get out of debt?
Debt consolidation can help you get out of debt if you’re committed to making the payments on time and you’re not taking on any new debt.
As long as you pay back the loan on schedule, the balance would eventually go down to zero. You’d have no debt at the end of the repayment term unless you charge new balances on credit cards or take out new loans.
The key to making debt consolidation work for you is sticking with the plan. Otherwise, you may not be satisfied with the end result and in a worst-case scenario, you’ll end up with even more debt.
10. How do I get a debt consolidation loan?
The first step to getting a debt consolidation loan is adding up how much you need to borrow. You can then start comparing debt consolidation loan options online.
Debt consolidation loans are offered by banks, credit unions, and online lenders. When comparing loans for debt consolidation, pay attention to:
- Interest rates
- Minimum and maximum loan amounts
- Repayment terms
- Fees, including origination fees, late fees, or prepayment penalties
- Loan funding speed
The interest rate you pay and the amount you can borrow will depend on your credit history and the lender you choose. It may be helpful to check your credit scores first to get an idea of what kind of loan terms you’re most likely to qualify for.
Many lenders allow you to check your rates without impacting your credit scores so you can estimate how much you might pay. Checking your rates can help you find the right lender for your needs and situation.
The Bottom Line
Debt consolidation may be right for you if you’re tired of spinning your wheels with debt repayment or you simply want to make paying off debt less of a hassle. With the right lender, you might be able to save money on interest and get fast funding to your bank account in as little as 24 hours. If you’re ready to banish debt for good, take the next step and compare your best debt consolidation loan options online today.
