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Debt consolidation is a popular way to manage and organize high-interest debt. When you consolidate, you take out one new loan with one monthly payment to replace multiple streams of debt.
Consolidating can be a confusing process, but thankfully it’s not too hard to find someone who hasn’t taken out a consolidation loan at least once in their lifetime. I asked current debt consolidation borrower and Bankrate Editor Rhys Subitch how they’re managing their loan, how they’ve benefited and what they’ve learned along the way.
When to consider consolidating your debt
There are a variety of ways to consolidate your debt, including balance transfer credit cards, home equity loans, personal loans and debt management plans. It may be a no-brainer to consolidate for some, but for others, it may not make the most sense.
It really only makes sense to consolidate if you’re offered a more competitive rate or better terms than your existing loans. For Rhys, like many borrowers, the decision was based on the repayment timeline.
“My debt consolidation payment is a fairly large chunk of change,” explained Subitch. “In total, my minimum payments would have actually been less than the debt consolidation loan, but it also would have taken significantly longer to pay off the entirety of it.”
At the end of the day, consolidation is a personal decision, but make sure the rate you’re offered is more competitive, the monthly payment is manageable and the term you’re given is more conducive to your financial goals than what you have now. You can use a consolidation calculator to help you decide if it’s the right option for you.
Managing a debt consolidation loan
As a borrower, the worst place to be is stuck in a seemingly endless cycle of high-interest debt. However, with a properly managed consolidation loan, the potential to rack up more debt is significantly reduced, especially if you set up automatic payments.
When you opt into an automatic payment schedule, you’ll link your bank account information to the loan through your lender or servicer. From there, your fixed payment will be transferred automatically on the same day every month.
“Using automatic payments is truly an anxiety buster for me. I don’t have to worry about missing a payment, and it’s one less task each month,” Subitch said, adding that they only have one payment now instead of three and are able to pay a little extra each month when they have the funds.
What borrowers need to know before consolidating
For many borrowers, the idea of organizing multiple streams of debt from different lenders into one fixed payment is an enticing reason to consolidate. However, it’s just as important to consider the potential monthly payment increase and what that could mean for your current financial situation.
Even though the fixed payments are much easier to manage, Subitch gives potential borrowers one piece of advice: “Sit down and work out your budget,” they say. “Make sure that even if it’s more than your minimum monthly payments that it’s manageable.”