If you’re tired of juggling multiple high-interest credit card payments every month, you may be thinking about a debt consolidation loan. These are typically fixed-rate loans designed to allow you to consolidate multiple payments into a single monthly payment and — ideally — save you money in interest, too. You may also be able to pay off the loan balance more quickly. Let’s dive into how debt consolidations work.

The Basics

Traditional banks, credit unions and online lenders all offer debt consolidation loans. They are typically fixed-rate personal loans that allow you to pay off other outstanding credit balances and leave you with a single monthly loan payment.

These loans often offer lower interest rates than credit cards, which allows more of your monthly payment to go toward paying off the principal. And because they’re fixed-rate loans with a set monthly payment, they make it easier to budget.

Another way to achieve debt consolidation is through a credit card balance transfer. If you can qualify for a zero-percent interest rate credit card, you can transfer other outstanding balances to that card and make progress toward paying off the principal.

Regardless of how you consolidate and pay off your debt, it’s important to not continue charging on those accounts once you’ve transferred the balances. To do so defeats the purpose of consolidation. And you’ll end up in more debt than when you started.

Advantages of a Debt Consolidation Loan

A debt consolidation loan can help you save money by allowing you to pay off high-interest debt with a lower interest rate loan. Additional advantages include:

• Making one monthly payment vs multiple payments
• An opportunity to improve your credit by lowering your credit utilization
• A chance to change your spending habits for the better

Disadvantages of a Debt Consolidation Loan

Although a debt consolidation loan can be an effective way to simplify your finances and pay off debt, it’s not the right choice for everyone. Disadvantages of a debt consolidation loan include:

• Possible loan origination fees and other fees
• Opportunity to charge additional purchases
• Could mask underlying money management issues

Be Cautious When Applying

Before you apply for a debt consolidation loan or balance transfer credit card, you’ll want to do your research and choose two or three options that give you the best chance of approval.

That’s because each application will result in a hard pull of your credit report, which can drop your credit score. It’s a temporary dip, but too many applications in a short period of time can do damage. Plus, multiple back-to-back inquiries can make it appear you’re experiencing financial hardship and chasing credit, which could make lenders reluctant to lend.

Alternatives to a Debt Consolidation Loan

If you’re not approved for a debt consolidation loan due to your current credit, it doesn’t mean you’re stuck making multiple payments on high-interest credit cards every month.

A debt management plan is an effective alternative to a debt consolidation loan. And there’s no minimum credit score required to qualify. Benefits of a debt management plan include:

• Lower interest rates
• Multiple payments consolidated into one monthly payment
• An end to collection efforts
• A path to bring accounts current
• Pay off credit card debt more quickly

Credit counseling is the first step to find out if a debt management plan is the right solution for you. You can complete self-guided online counseling any time or talk with one of our certified credit counselors.  You’ll receive a personalized budget, action plan and recommended debt solution — all at no charge.