What does it mean to consolidate debt?

When a person has accumulated a number of debts from a variety of sources, debt consolidation can be achieved by taking out a loan to pay off all existing debts. That leaves just one debt to pay off — the loan they just took out.

Before someone consolidates their debt with one loan, they should consider a few things:

  • Do the math on the interest rates of current debts, and figure out how long it’ll take to pay them off on the current payment schedule. Compare that to the length of the debt consolidation loan. The loan for debt consolidation may cost more in the long run — even if it has a lower interest rate than the interest rate of the outstanding debts.
  • Find out what the monthly payment would be on the loan used to consolidate the debt. If the monthly loan payment is less than the current outstanding debt payments, it could provide the breathing room necessary to continue making regular payments — although it may end up costing more interest over time, since the loan term will probably be long. Or, if the monthly loan payment is more than what is currently being paid on existing debt, it may help save on interest in the long run.
  • Improve spending habits. Loans that consolidate debt won’t change the behaviours that got the individual into debt in the first place.

Debt consolidation loans can offer people the breathing room they need to get out of debt and organise their finances if they are completely committed to it. It can stop the hassle of juggling bills and worrying about how to make multiple payments of varying amounts each month. They just should do the math to be sure it's a good choice.

If you're interested in learning more about loans from On Stride Financial, please read more about the online loans we offer, or contact us today!