3 Ways Debt Consolidation Can Make Debt Payoff Easier

If you are working on paying off your debt, you may want to look into debt consolidation.

Debt consolidation works by getting a new loan, such as a personal loan. You'd use the proceeds from the personal loan to pay off multiple existing debts. You could also consolidate debt using a balance transfer credit card by moving the debt from multiple cards onto one new one offering a low promotional rate on transferred balances.

Whatever approach you take, debt consolidation can often make debt payoff easier for three key reasons.

1. Reducing the number of monthly payments you make

Consolidating debt can make life easier for you if you have multiple loans by combining all of them into one. Instead of having to remember to write checks to two, three, four, or more different creditors every single month, you can just make one convenient monthly payment.

By combining all your debt, you also eliminate the question of which loans to focus on paying off first. You don't have to try to prioritize debt with high interest rates or debts with low balances so you can score a quick win. You can focus all your attention and send all your extra cash to your single debt consolidation loan.

2. Providing a fixed payoff time

If you get a personal loan to consolidate debt, your loan is going to have a repayment term that you're aware of from the moment you borrow. For example, you might take out a personal loan with a three-year payoff term or a five-year payoff term.

Once you have that loan with a set payoff deadline, you will know exactly when you're going to be debt-free. Of course, you could choose to try to pay off your loan faster. But even if you don't, there will be a clear endpoint.

This is very different from when you have credit cards where you could get stuck paying minimum payments for years. It's also different from a situation where you're trying to pay off multiple different creditors and there's different end dates for each debt.

It can be quite comforting to know when you'll reach your goal of becoming debt-free, and you're more likely to stay motivated when there's a date you know you'll be done.

3. Lowering your interest rate

Finally, consolidating debt can make paying it off easier if you get a new loan with a lower interest rate.

Reducing your rate can make total payoff costs lower by allowing more of your money to go to the principal each month. As long as you don't make your repayment timeline a lot longer, you'll save money over time and lower each monthly payment, so you get a double win.

Say, for example, you have two loans currently -- a $5,000 loan at 17% that you're paying $100 per month on and a $10,000 loan at 10% that you're paying $250 per month on. Now say you consolidate to a new personal loan with a 60-month repayment term and an 11.51% APR. You would end up making a payment of $329.93 per month, so you'd save about $20 per month. You'd also reduce your repayment time by 2.3 years and save a total of $1,178.20 in interest.

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It's well worth the money saved, especially when combined with the other benefits. So if you're currently paying off debt, consider whether you can qualify for a consolidation loan at a lower rate. If you can, taking advantage of that opportunity may be a smart financial move that will make it a lot easier to become debt-free.