Being in debt can be mentally draining. Having to worry about managing payments for multiple debts, whether credit cards, medical bills, or some other unsecured high-interest debt, can almost become a part-time job. While tools like automated payments certainly help make things easier, debt consolidation loans can help restructure debt into a single monthly payment. Explore the benefits of debt consolidation loans to streamline your debt management and reduce financial stress.

How a debt consolidation loan works

A debt consolidation loan is a personal loan that helps someone move multiple high-interest debts into a single loan with one manageable monthly payment. When applying for a personal loan for debt consolidation, an applicant will need to submit personal and financial information, including their credit score, income, and history of bankruptcy. If an applicant is approved, the lender may pay existing debtors directly or provide the borrower with the funds to do so. Once complete, the only remaining monthly debt payment is to the lender who issued the debt consolidation loan.

Reasons for debt consolidation

There are several reasons someone might turn to debt consolidation, including:

• Secure a lower interest rate: For many borrowers, the primary purpose of a debt consolidation loan is to save money on interest. Say someone is carrying a balance on four different credit cards with interest averaging 20%. If they can shift the balance of those four cards to a personal loan with a 15% interest rate, they’ll instantly save 5% on accrued interest. In turn, that money can be used to help pay off the debt more quickly.
• Lock in a lower monthly payment: Alongside a lower interest rate, borrowers may find that a debt consolidation loan affords them a lower monthly payment. The size of the monthly payment will vary depending on the interest rate and loan term, but shifting debt to a lower-interest loan with a longer term is likely to afford lower monthly payments.
• Move from a variable to fixed interest rate: Many high-interest debts, like credit cards, have a variable rate, meaning they can increase or decrease as broader market rates fluctuate. Since personal loans often have fixed interest rates, borrowers can anticipate paying the same interest rate over the life of the loan. Not only does this make payments easier to budget for, but a borrower will also know their exact debt payoff date when they sign for the loan.
• Shift to a single monthly payment: Managing multiple debts can be challenging, especially for borrowers who find themselves struggling to meet payments throughout the month. Having a single loan and payment could make it easier for borrowers to line up the due date with payday or a time during the month when they know they’ll have the money to cover what’s due.
• Improve credit score: Some people with multiple debts struggle to manage payments and may be late or miss them entirely. Moving from multiple monthly payments to one may increase the likelihood of being able to pay the balance due on time each month. Since timely payments account for a large chunk of someone’s credit score, consolidating debt may help boost their score after months of timely payments.

The bottom line

Borrowers should be aware that while a debt consolidation loan may offer a lifeline to streamline debt repayment, it does little to address the underlying reasons for getting into debt. It’s worth speaking with a financial professional who can help identify causes like overspending that may have led to excessive debt in the first place. Then, once harmful habits are identified and corrected, a debt consolidation loan may help simplify ongoing financial management.

Advisory Disclaimer

This content is sponsored by BHG Financial and is provided solely for general informational purposes. It is not intended as a substitute for financial, legal, or business advice specific to your circumstances. We recommend that business owners and individuals consult with their own advisors to evaluate how the information applies to their situation. To find out more about BHG’ financing solutions, including terms, availability, and associated costs, please visit the BHG Financial website or speak with a BHG Financial representative.

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Name: Sonakshi Murze

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