Consolidating debts into one principal amount and monthly payment can be a beneficial strategy for managing multiple debts and reducing your total interest expense paid to creditors.

There are both positives and negatives, which we will outline in this article.

What are the Main Benefits of Debt Consolidation?

Simplified Payments. Instead of tracking several due dates, payment amounts, interest rates, and other charges, debt consolidation allows you to make just one simple payment each month. The single payment made each month will be to only creditor and is generally a fixed interest rate.

Reducing your payments to one per month will reduce the likelihood of missing a payment and give you greater peace of mind.

For example, suppose John has $10,000 of credit card debt across four different credit cards (i.e., $2,500 per card). He must track the minimum amount due and payment dates for four separate cards.

If he could consolidate his debts into one principal amount of $10,000 and one monthly payment to a single creditor, it would be easier for him to track these obligations.

It’s important for individuals and businesses to make timely payments, as late payments will negatively impact their credit scores.

Potential Lower Interest Rates and Costs. If an individual qualifies to consolidate their loans with a lower interest rate than their current debts, they can save a substantial amount on interest expense.

The lower interest rate opportunity is beneficial if you’re consolidating debts with high interest rates, such as credit cards and other personal loans.

For example, suppose John owes $5,000 to Company A at an interest rate of 18% and $4,000 to Company B at an interest rate of 17%. John receives an offer to consolidate his credit cards using a personal loan of $9,000 at an interest rate of 14%. This offer may help him reduce his overall interest expense on the $9,000 debt.

Debt Payoff Timeline. Consolidation loans often have a fixed repayment term, giving you a clear timeline for debt-free. The set timeline can give you greater control over your finances because you can see the light at the end of the tunnel.

Potential Credit Score Improvement. Consolidating debt may improve your credit score by reducing your credit utilization ratio and making it easier to keep up with payments.

Lower Monthly Payments and Improved Cash Flow. Debt consolidation with a lower interest rate and extended repayment term may lower the total amount of cash you must transfer each month. The lower cash payments help improve your monthly cash flow.

Conclusion

Consolidating your debts can be a very effective tool for simplifying your financial obligations. However, weighing the potential downsides, such as longer repayment terms and the risk of higher overall costs is important.

Before consolidating, consider your financial situation carefully and compare your various loan options.