When to Consider a Personal Debt Consolidation Loan

A personal debt consolidation loan can help you reduce total monthly debt payments, reduce the overall rate of interest you are paying and reduce the number of checks you write and loans you keep up with monthly. The following will help you understand how debt consolidation works and evaluate if it's the right move for you.

How Debt Consolidation Works

The goal of a personal debt consolidation loan is to combine multiple high-interest loans into one loan, with a lower interest rate and reduce your monthly payment amount.

Over half of all Americans have a credit card; about 15 percent of the population has 10 or more cards. The average interest rate on credit cards is almost 15 percent. If you are carrying multiple balances at high rates, it is possible to take out a personal debt consolidation loan that pays off all those balances and replaces them with one loan with a much lower rate. An average personal loan rate is about 11 percent.

When Interest Rates Are Falling


If interest rates are falling, or your financial circumstances improve so that you qualify for lower interest rates, it's time to look at your highest-interest debt to determine if consolidation makes sense.  Consider the following, before jumping into a personal debt consolidation loan, to make sure you don't end up in a worse position:

    * Are there fees or penalties for paying off your debt early?
    * How long will it take to pay off the consolidation loan?

When Adjustable Rates Are Rising

Many credit cards and short-term loans have low initial rates that rise after a predetermined period. If rates are falling or you can get a lower rate, watch for the adjustment period. It could be the right time to consider a personal debt consolidation loan.

When Debt Is Affecting You Physically

Financial stress can affect you physically, rob you of sleep, and affect your diet and your emotional well being. If the stress of debt is having that effect on your personal life, a personal debt consolidation loan can ease the worries. It might be more important to reduce the stress, even if you are paying a higher total bill over the life of the loan.

When You're Ready to Change Habits

For most borrowers considering a personal debt consolidation loan, they are doing so because of previous over borrowing and current financial difficulties. Often those seeking a debt consolidation loan are having trouble keeping up with payments.

One consolidation loan company estimates more than 70 percent of personal debt consolidation loan borrowers end up with more debt than they had at the beginning of the consolidation process. In other words, they didn't change financial habits and made their financial situation worse. Financial experts say the smart use of debt consolidation is to get rid of as much debt as possible beginning with the most expensive debt first. Be sure you are ready to begin building sound financial habits before considering a personal debt consolidation loan.

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