Spring Cleaning For Your Finances: Debt Consolidation

With the dark doldrums of winter nearly over it's time for some spring cleaning. As cliche as it may be this annual tradition is one that serves to make us reconsider our priorities, toss aside what we no longer need, and straighten up our lives overall. That's why spring is also the perfect time to consider consolidating your debt and start along the bright path to becoming debt free. Debt consolidation may sound counter intuitive: taking on debt in an effort to escape it? However the truth is that there are actually many benefits that can be gained by paying off your credit cards and making a single loan payment instead. Additionally there are many different forms of debt consolidation for you to consider, as well as some pitfalls you'll want to avoid when researching your options.

The Benefits of Consolidating Your Debt

Before we get into what kind of debt consolidation products are available it's worth looking at what some of the benefits of consolidating are: Save money

The best part about consolidating your debt is that you're often able to secure a loan that carries a lower interest rate than your credit cards. According to marketplace lender Lending Club the average credit card APR is 20.24%. Meanwhile the average APR for a personal loan on their platform is 14.99% — 35% lower. To put that into perspective suppose you have $15,000 in credit card debt that you're looking to consolidate with a loan. With a 14.99% APR your monthly payments on a loan would be $519.87 for 36 months, giving you a total payoff of $18, 715. If you paid that same amount each month on your credit card that held a 20.24% APR you would end up paying $20,795 over the course of 40 months. Even worse is if you only paid the average minimum on your credit card debt, it would take you more than 15 years to pay off the debt and cost you over $25,000.


Another great thing about debt consolidation loans is that they force you to be more disciplined in paying off your debt. The temptation to only make the small minimum credit card payment is erased forcing you to make better financial choices. Additionally knowing the terms of your loan will allow you to see the light at the end of the tunnel and observe real progress being made each month.


Usually when people mention the savings associated with consolidation loans they're referring to money. However an overlooked aspect of  these loans is the time it saves. Instead of having to keep track of different due dates and making payments on multiple credit cards throughout the month, you'll be able to make one quick, easy payment a month that can even be taken out of your checking automatically. This will also help you avoid missed or late payments that can sometimes occur when you have multiple bills to juggle.

Types of Debt Consolidation

Consolidation comes in many forms. Before you can determine which is right for your situation you should know what each one is and how it works.

What is a debt consolidation loan?

Simply put debt consolidation loans are personal loans that will allow you pay off your credit cards and other debts to avoid higher interest rates and fees. These loans can be secured or unsecured and have terms typically ranging from 24 to 60 months. Usually consolidation loans are paid back in monthly installments, which are predetermined before you accept the loan.

What is the difference between secured and unsecured loans?

A secured loan is one that requires assets such as your house or vehicle be put up as collateral. Since this lowers the level of risk for the bank or other lender you may be able to get a lower rate on the loan and borrow more money. However it's important to note that, should you default on your loan, you could lose your collateral. An unsecured loan requires no collateral and these types of loans have become more popular thanks to an influx of online lenders such as Lending Club. Instead of being based on your assets decisions about your loan eligibility, including your APR, are determined by your credit score and other indicators of your credit worthiness. It should be noted that while you won't lose you home or car as the direct result of defaulting on an unsecured loan, doing so could  still badly damage your credit.

What is credit card consolidation?

Another tactic for consolidating debt is what's known as credit card consolidation or balance transfers. The idea here is to open a new credit card that offers a low (sometimes even 0%) introductory interest rate and move all of your other credit card balances to that one card. Of course the most common problem with these plans is that you will want to make sure you can pay off the debt before the introductory rate expires and that timeframe can be pretty short. If you miss that window you could find yourself right back where you started as their rates after this period are typically much higher than those on debt consolidation loans.

Consolidation Pitfalls and How to Avoid Them

Despite the apparent benefits there are some consumers and financial advisers that warn against debt consolidation loans. However many of the concerns that they have about such loans can be addressed by avoiding some common mistakes:

Calculate the terms of your loan 

The top mistake that consumers might make is accepting a debt consolidation loan because the payment is lower than what they're currently paying. That may sound like a good thing but remember that the entire idea is to get out of debt as soon as possible. In some cases the terms of your loan will only draw out your debt and perhaps even cost you more money in the long run (even if the interest rate is lower). To avoid this issue be sure to find a lender who will let you choose the length of your loan and be sure to run the numbers. You'll want to calculate how much you can afford to pay each month, how long it would take you to pay off your credit card with that payment, and how much you'd end up paying including the interest. Be sure to compare that to the terms of the consolidation loan you're applying for to see if you're really getting a good deal.

Change your habits

Suppose you do pull the trigger on a consolidation loan and are able to pay off your credit cards: what do you do next? Unfortunately far too many people leave their accounts open and go back to the same spending ways that got them into trouble in the first place. A debt consolidation loan will only help you if you're serious about changing your spending habits and getting out of debt. Otherwise you're just causing more trouble for yourself.

Pay more when you can

The one good thing about credit cards is that you can pay off as much of your debt as you'd like. Of course the problem is that many can only afford to or only wish to pay the minimum each month, which not only prolongs the debt but also accumulates interest charges. That's why when looking for a consolidation loan you'll want one that won't charge you a penalty for paying off your debt early. This way you'll be able to put holiday bonuses, tax returns, and other "found money" towards paying off your debt faster and saving on interest costs.

With springtime upon us it's a great time to start cleaning up your finances. If you're ready to start paying off your debt, a consolidation loan could be in your best interest. By researching which type of loan you want and making sure to avoid some common stumbling blocks you'll be able to enjoy the benefits of consolidation loans on your way to becoming debt free.

Additional Debt Consolidation Resources:

Is Debt Consolidation a Good Idea? A Look at Your Options

5 Tips for Getting Out of Debt in the New Year

3 Methods of Attack for Paying Down Your Debt

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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