Taking for a debt consolidation loan might help you reduce an overwhelming pile of bills and creditors into a manageable monthly payment. And, if you qualify for a loan with a low enough interest rate, consolidation may potentially save you money. However, if you are not careful, the perks of a debt consolidation loan can rapidly turn into financial problems and leave you back in debt.
Here are some recommendations for managing your debt consolidation and ensuring that your debt does not resurface.
How to manage your debt consolidation and stay out of debt
- Figure out how much of a monthly payment you can afford
- Apply for a loan that pays your creditors directly
- Sign up for autopay
- Stop adding to the debt while paying it off
- Bottom line
Determine how much you can afford to pay each month.
Before you apply for a debt consolidation loan through a personal loan provider, sum up the balances of all the bills you want to consolidate so you know how much money to request.
Keep in mind that once accepted and funded, you will be responsible for repaying your new loan. The payments are made in equal monthly installments, plus interest. Examine your monthly budget to ensure that there is room (or that you can make some) for this additional cost. The last thing you want to do is overextend yourself and end up putting additional costs on credit again.
If you engage with a trustworthy lender, they should provide you some leeway in terms of loan arrangement and monthly payment amount. Accepting a loan with a shorter repayment period (in other words, you have less time to repay the loan in full) saves you money on interest costs but increases your monthly payments.
Accepting a loan with a longer payback period, on the other hand, may result in lower monthly payments, but you will spend more in interest payments throughout the life of the loan.
Upgrade, one of our favorite debt consolidation personal loan providers, provides payback options ranging from 24 to 84 months, with no penalty for paying off your loan early.
Apply for a loan that will immediately pay your creditors.
When it comes to debt management, try to simplify the process and make it as simple for yourself as possible. When you apply for a personal loan, the money are typically put into your bank account so that you may utilize them as planned.
However, some debt consolidation lenders will pay your creditors immediately. You won’t have to worry about dealing with each loan separately this way. You’ll often just need to supply your debt consolidation loan lender with the details for each creditor, as well as the precise amount you want your lender to pay each of them.
Enroll in autopay
When you’re ready to begin repaying your debt consolidation loan, be sure you don’t skip a payment. This might result in late fines and a drop in your credit score. In addition, if you request for lines of credit in the future with a lower credit score, you will face higher interest rates.
Don’t put more strain on your memory than necessary. Sign up for autopay, and your monthly payment will be deducted from your associated bank account without you having to do anything.
Furthermore, some lenders provide a minor discount for enrolling in autopay. LightStream, for example, offers borrowers a 0.50% rate reduction when they enroll in autopay.
Stop adding to your debt while you’re paying it off.
If you are successful in consolidating your debt, your payments will appear more reasonable, and you will (hopefully) feel less anxious. This is the time when you may be tempted to start charging things on your credit cards and carrying a debt from month to month. Don’t do it since you’ll only create a new source of debt that you’ll have to pay off someday.
That doesn’t imply you should cancel your credit cards; in fact, closing credit cards might harm your credit score because it reduces your total available credit, which raises your credit use rate. If you must use a credit card to pay off debt, use it like a debit card and don’t make any charges that you can’t promptly pay off with money in your bank account.
Debt consolidation is a good approach to get better organized, save money, and pay off several obligations. While you’re paying off your new loan, be sure you’re utilizing your credit sensibly and making all of your monthly payments on time.
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Source: CNBC Select