Banking and Finance

Is Loan Consolidation Worth It? 5 Things to Know About Consolidating Debt

July 27, 2021

About one in 10 Americans default on their student loans each year. And, consolidating student loan debt is one of the easiest ways to make your monthly payments more manageable. But, is it worth it?

There are various types of debt consolidation, from consolidating credit card debt to medical bills and, of course, student loan debt. Debt consolidation loans are pretty popular, especially right now while interest rates are low, but there are a few things to consider before opting to consolidate all your debt into one loan.

Check out our list of five things to consider when figuring out whether or not loan consolidation is worth it.

What to Know About Debt Consolidation

1. There Are Different Types of Debt Consolidation

When refinancing your student loans, you’re able to lump all of your loans into one new debt consolidation loan with one interest rate. Sometimes, this is better than what your overall payments and interest would have been otherwise. But, it’s not your only option. Depending on the type of debt you have, you can consolidate debt by transferring it to a zero or low-interest credit card, you can change your repayment plan to a consolidation plan, or you can take out a debt consolidation loan. There’s no one solution that’s “right,” it really just depends on how much debt you owe, what the interest rate on it is, and how 

2. Debt Consolidation Loans Are Helpful for Credit Card Debt

If you’re looking to consolidate credit card debt, consider contacting a local lender to ask about their debt consolidation loans. While experts don’t usually suggest taking on more debt to pay off existing debt, this is a bit different. If you have a lot of different loans to pay off, particularly high-interest debt on credit cards, you can receive a debt consolidation loan with a (sometimes) lower interest rate. You take that loan, pay off your high-interest debt, and then you’re only left to pay off the consolidation loan, which, if you have a good credit score, usually comes with an interest rate as 13 to 18%. Compare that to an average 20% interest rate for credit cards and it’s easy to see why it’s an appealing option.

3. Debt Management Plans Are Sometimes Better

American Consumer Credit Counseling is a non-profit that offers services to people looking to manage their debt and develop healthy financial habits. They can help you make sense of whether or not debt consolidation is worth it for you or if you might fare better by option for the debt consolidation plan. However, as they mention, sometimes sticking with a standard repayment plan is better, as long as you’re receiving assistance on how to efficiently manage your existing debt. This forces you to develop better financial habits. Instead of taking out a whole new loan (as mentioned above), you’ll consolidate payments to creditors by writing one check each month to ACCC. In turn, they’ll pay your bills on time and even advocate on your behalf for lower interest rates.

4. Now Is the Time to Refinance Student Loans

Interest rates have dropped to historically low levels which means that there’s really no better time to refinance your student loans. Now, it’s important to note that refinancing is not the same as consolidating. But, it can be a helpful strategy in paying off student debt to avoid having to consolidate later down the road. If you’re able to pay off your loans consistently for the next few years, refinance them to enjoy super-low interest rates while they last. However, it’s worth mentioning that if you do choose to consolidate or refinance your loans, you won’t be able to continue to enjoy the 0% interest rate that the government’s mandated during the freeze on payments through September 30th, 2020.

5. Debt Consolidation is Best for Smaller Debts

So, does debt consolidation make sense for you? As mentioned, it depends on the type of debt you have and how much of it you have to pay off. As a general rule of thumb, those with high debt-to-income ratio shouldn’t consolidate their debt, and likely won’t be eligible to anyway. If your debt doesn’t exceed about 40% of your income, however, then consolidating might make sense. This is the same for those with great credit scores; the higher your credit score, the more likely it is that you’ll be approved for a low-interest debt consolidation loan that makes consolidating worth the effort.

How to Stay On Top of Debt

If you’re able to learn how to budget your money effectively and can make it a point to pay off your debts on time, a debt consolidation loan won’t be necessary. This begins by committing to avoiding taking on more debt (if possible) and adopting an aggressive repayment strategy that allows you to pay off your debt as fast as possible.

If you’d like a little extra help in terms of savings to allocate towards your debt repayment, look into something like a Cheese debit card that will allow you to enjoy zero fees when spending and also get cashback and saving bonuses. Saving money to use to pay off debt without any extra work? It doesn’t get much easier than that. Sign up today to begin optimizing your finances.

Here're more you need to know bout loans:

5 Great Payday Loan Apps for Accessing Quick Cash

5 Things to Know Before Taking Out A Loan

Can I Get Mortgage Loans with Bad Credit?

Everything You Need to Know About Auto Loan Refinancing

How to Apply for Student Loans: Navigating FAFSA

How to Lower Your Private Student Loan Payments?

Is Loan Consolidation Worth It? 5 Things to Know About Consolidating Debt

Repayment Options for Student Loans

The 10 Best Student Loans of 2020

10 Tips for How to Get a Personal Loan