What are the benefits of debt consolidation?

By Miranda Marquit

Reviewed by James Heflin

Aug 28, 2023

Read time: 4 min

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Key takeaways:

  • Debt consolidation combines multiple debt payments into one payment.

  • Often, debt consolidation results in lower monthly payments, giving your budget more breathing room.

  • A debt consolidation loan could help you improve your credit standing.

Improving your finances can make you feel smarter and more confident. Debt consolidation is a positive step that can help you put a renewed focus on improving your financial situation. Debt consolidation can provide a clearer path toward becoming debt-free and give you the satisfaction of knowing you're tackling your financial goals. 

1. Simplify your finances

Debt consolidation replaces multiple smaller debts with a new, larger loan, helping you reduce the number of payments you have to make each month. With this approach, you don't have to keep up with several payments and due dates. Instead, you make one payment each month. Debt consolidation can streamline your finances. Things are simpler, and it's easier to keep track of your debt repayment progress. Reducing the number of payments can help you keep track of your bills and avoid missing a payment. This provides peace of mind, as well as financial benefits. And this sense of organization can give you a much-needed feeling of control.

Getting a new start with a simpler repayment process is a valuable part of tackling your debt. 

2. Get a lower interest rate

Often, you can get a lower interest rate with a debt consolidation loan, to replace several higher-interest debts—like credit card bills.

A lower interest rate could save you money over the course of your repayment. With high interest rates, a significant portion of your monthly payments goes to interest. This slows down the repayment process. A lower interest rate means less of your payment money goes toward interest. That can help you reduce your overall debt faster.

Look for a debt consolidation approach that gives you a lower interest rate than the average of all your existing debts' rates. You'll save money as you get rid of debt—and those savings on the road to debt freedom can be used for other financial goals.

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3. Lower your monthly payments

In addition to a lower rate that helps you pay debt off more effectively, debt consolidation might reduce your payments. If you have several high-interest credit cards and loans, you're probably paying a lot each month in minimum payments.

The monthly payment on a debt consolidation loan is often lower than the combined monthly payments on the debts you want to consolidate. Also, in addition to potentially lowering your interest rate, debt consolidation could give you more time to pay. The end result could be a lower monthly payment and some breathing room in your monthly budget. 

If you've struggled to pay other bills because of your debt, debt consolidation might help you get back on track. You could end up with better cash flow for groceries, utilities, insurance payments, gas, and other necessities.

Plus, debt consolidation might give you room to work toward other financial goals while you're getting out of debt. If your payment comes down, you might be able to:

  • Build or rebuild your emergency fund

  • Save for retirement

  • Save for goals like a home down payment 

  • Prepare for a large purchase

Freeing up space in your monthly budget is a valuable way to move forward with your finances while you get your debt under control.

4. Improve your credit standing 

Reducing the number of bills you pay could help you avoid missing a payment due date. Paying on time is one of the best ways to maintain healthy credit. Getting an affordable payment can also help you avoid a situation where there isn't enough money to meet your monthly obligations.

A debt consolidation loan could have other positive effects on your credit. Although applying for a new loan can cause your score to dip, if you use a new loan to pay off high-interest credit cards, you could reduce your credit utilization (the percentage of your credit card limits that you're using). High credit card balances can hurt your credit standing. Moving that debt to an installment loan can have a positive effect (if you don't follow it up by charging your cards back up). 

Healthy credit opens up future opportunities for better interest rates and financial stability.

Between on-time payments and lower credit card debt, you might be surprised at how quickly your credit can build.

5. Debt management and financial planning

Debt consolidation can help you manage your debt and plan for your financial future.

The burden of multiple debts can be mentally and emotionally draining. Debt consolidation is a tool you can use to take charge of your financial future with proactive decisions that help you reach the finish line. By bundling multiple debts into a single manageable payment, you could start seeing progress sooner than you think. 

When you have a lot of debt, it can feel overwhelming. Debt consolidation lets you take control by getting the debt into one place. While it doesn't reduce what you owe, consolidating could make it easier to pay off your debt. 

It can be tough to make plans when all your income is going toward debt. Debt consolidation lets you take control and start moving forward.

Debt consolidation isn't the right path forward for everyone. Consider the pros and cons of debt consolidation, and think about whether streamlining your finances will help you with debt management and financial planning. Get a free debt evaluation from a professional who can help you understand the options that might be right for you.

Author - Miranda Marquit

Miranda Marquit is an award-winning freelance writer and podcaster who has covered various financial topics since 2006. Her work has appeared in numerous media outlets, and she is frequently asked to host workshops and appear on panels on topics related to financial wellness. She is the co-host of the Money Talks News podcast and a consumer finance advocate and spokesperson for moving hub HireAHelper.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

Debt consolidation combines multiple debts. This is usually done with a loan to pay off other debts. After you consolidate multiple debts, you only need to make one payment, with one due date and one interest rate. Usually, the new interest rate is lower than the average rate of all the other loans. Additionally, the monthly payment might be lower than the combined amount you were paying.

Debt consolidation works by getting one large loan to pay off multiple smaller debts. After you've applied for and received a debt consolidation loan, you use the funds to pay off your other creditors. The consolidation loan lender might send the payments directly to those other creditors. Debt consolidation doesn't reduce the total debt, but it becomes more manageable.

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