Taking on a debt consolidation loan can help you turn an unmanageable tangle of bills and creditors into one simple monthly payment. And if you qualify for a loan with a low enough interest rate, you could even save money through consolidation. But the benefits of a debt consolidation loan can quickly turn into financial pitfalls and land you back in the red if you aren't careful.
Below, CNBC Select shares some tips for managing your debt consolidation and making sure your debt doesn't come back.
How to manage your debt consolidation and stay out of debt
Figure out how much of a monthly payment you can afford
Before you even apply for a debt consolidation loan through a personal loan lender, you should add up the balances of all the debts you're targeting so you know how much money to ask for.
Keep in mind that you'll be responsible for paying off your new loan once you're approved and receive funding. The payments are made in fixed, even monthly installments plus interest. Take a look at your monthly budget to make sure there's room (or that you're able to make some) for this additional expense. The last thing you want is to overextend yourself and wind up floating other expenses through a credit card yet again.
If you work with a good lender, they should give you some flexibility on how to structure your loan and the size of your monthly payments. Accepting a loan with a shorter repayment term (in other words, you have less time to pay back the loan in full) means you'll save on interest charges but your monthly payments will be bigger.
On the other hand, accepting a loan with a longer repayment term can leave you with smaller monthly payments, but you'll pay more in interest payments over the life of the loan.
One of our favorite personal loan lenders for debt consolidation, Upgrade, offers repayment terms ranging from 24 to 84 months, plus there's no penalty for paying off your loan early.
Accepts applicants with fair credit
Apply for a loan that pays your creditors directly
When it comes to managing debt, aim to simplify the process and make it as easy on yourself as possible. Typically, when you apply for a personal loan, the funds will be deposited into your bank account so you can use them as intended.
But with debt consolidation loans, some lenders will pay your creditors directly. This way, you won't have to worry about dealing with each debt individually. Typically, you'll just need to provide your debt consolidation loan lender with the information for each creditor as well as the exact amount you'd like your lender to pay each of them.
Sign up for autopay
Once you're ready to start paying down your debt consolidation loan, you want to make sure you don't miss a payment. This can saddle you with late fees and lower your credit score. And when you apply for lines of credit in the future with a lower credit score, you'll be subject to higher interest rates.
Don't put more of a burden on your memory than you have to. Sign up for autopay and your monthly payment automatically comes out of your linked bank account every month without you having to lift a finger.
Plus, some lenders give you a small discount for enrolling in autopay. LightStream, for instance, gives borrowers a 0.50% rate discount when they sign up for autopay.
LightStream Personal Loans
Annual Percentage Rate (APR)
6.49% - 24.89%* APR with AutoPay
Loan purpose
Debt consolidation, home improvement, auto financing, medical expenses, and others
Loan amounts
$5,000 to $100,000
Terms
24 to 144 months* dependent on loan purpose
Credit needed
Good
Origination fee
None
Early payoff penalty
None
Late fee
None
Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.
Stop adding to the debt while paying it off
If you successfully consolidate your debt, your payments will seem more manageable and you'll (hopefully) feel less stressed. This is when you may feel tempted to start racking up those charges on your credit cards and carrying a balance from month to month. Don't do that, as you'll just create a brand-new source of debt that you'll have to eventually pay down.
That doesn't mean you close the credit cards — closing credit cards can hurt your credit score since it lowers your total available credit, which can increase your credit utilization rate. If you have to use a credit card while paying down debt, treat it like a debit card — don't make any charges you couldn't immediately pay off with money you have in a bank account.
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Bottom line
Debt consolidation is an effective way to get more organized, save money and pay down multiple existing debts. While you pay off your new loan, make sure you're using your credit wisely and not missing any monthly payments.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best personal loan lenders.
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