Debt consolidation allows you to combine multiple debts into one new loan with lower monthly payments. But is it the right move for you? This guide examines the key benefits and drawbacks to make an informed decision.

What is Debt Consolidation?

What is Debt Consolidation? Debt consolidation means rolling multiple existing debts into one new consolidated loan. The goal is to reduce monthly payments and interest rates to pay off debt faster. This is achieved by taking out a new loan that pays off your current accounts.

Debt consolidation means rolling multiple existing debts into one new consolidated loan. The goal is to reduce monthly payments and interest rates to pay off debt faster. This is achieved by taking out a new loan that pays off your current accounts.

The Top 5 Benefits of Debt Consolidation

1. Lower Interest Rates
   Consolidating high-rate debts like credit cards into a low fixed-rate consolidation loan can significantly reduce the interest you pay over time (1). This leads to interest savings.

   
   

2. Single Monthly Payment
   One loan means tracking only one monthly bill. No more confusion or missed payments on different accounts.

   
   

3. Improved Credit Score
   Making on-time payments on the new loan may boost your credit score over time as positive payment history gets reported (2).

   
   

4. Lower Monthly Payments
   If qualified for an extended repayment term, consolidation provides more affordable monthly payments. But beware of higher total interest costs.

   
   

5. Fixed Interest Rate
   Consolidation loans offer fixed interest rates, giving you predictable payments and total interest costs.

   
   

   The Top 5 Risks of Debt Consolidation

   
   

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   While the monthly payment decreases, a longer loan term means you pay more interest overall. Make sure to run the numbers.

   
   

6. Origination and Other Fees

   
   

   Lenders typically charge 1-5% of the loan amount in upfront fees. These charges are deducted from the loan.

   
   

7. Ineligible Debts Remaining

   
   

   If you have high balances, your consolidation loan may not cover all debts. Some accounts can't be consolidated.

   
   

8. Losing Federal Loan Benefits

   
   

   Consolidating federal student loans makes you ineligible for income-driven repayment and forgiveness programs.

   
   

9. Reset of Repayment Timeline

   
   

   Consolidation restarts the clock; any progress made on paying down debts goes away. This prolongs the payoff timeline.

   
   

   Key Questions to Ask Before Consolidating

   
   

   1. What is the interest rate reduction relative to your current debts?
   2. How much can you lower the monthly payment, and is the new payment affordable?
   3. Will the fees and higher total interest outweigh interest savings?
   4. Do you have discipline not to rack up more high-interest debt?
   5. Are you willing to give up federal student loan benefits if consolidating those?

   
   

   Alternatives to Debt Consolidation Loans

   
   

   Here are a few options beyond consolidation loans to consider

   
   

   • Credit counseling - Counselors can help negotiate lower rates and payments.
   • Balance transfer credit cards - Transferring high-rate balances to a 0% intro APR card.
   • Debt management plan - Creditors agree to lower rates and waived fees so debts can be repaid.
   • Debt settlement - Lump-sum settlements are negotiated for less than you owe. But fees apply and credit score drops.
   • Bankruptcy - Court-supervised process to eliminate debts under Chapter 7 or Chapter 13. Major long-term damage to credit.

   
   

   The Bottom Line

   
   

   Debt consolidation loans can provide payment relief and interest savings. But carefully weigh the pros and cons based on your specific debts and finances. Consolidation works best for those with mounting high-rate credit card debt but the discipline not to overspend. Your best path forward depends on analyzing all options.

   
   

   
   

   
   

   
   

   For a free debt analysis and relief quotes tailored to your situation, visit CuraDebt.com. Their debt specialists can advise if consolidation or alternatives like credit counseling or debt settlement better fit your circumstances.