If you’re managing multiple high-interest debts, you might be considering taking out a loan to consolidate and conquer. But sometimes, it can be challenging to know when debt financing is a wise move. Here’s how to know if it’s the right time to take out a loan, depending on your unique financial situation.
You Have a Plan to Become Debt-Free
Consolidating debt can be a smart financial move, but not if you haven’t put safeguards in place and come up with a plan to prevent you from taking on more. Your plan to pay off debt should outline how you’ll manage ongoing debt payments and where the money to make those payments will come from.
You’ll also want to have a strategy for saving toward big purchases in the future to avoid using debt as a way to fund them. If the spending habits that got you in debt haven’t been addressed, it’s not the right time to take out a loan.
You’re Holding a Lot of High Interest Debt
Debt consolidation loans are one way to bring all of your debts together into one lump sum payment with a reasonable interest rate. Where these loans really benefit is if you’re looking to combine several credit cards or other high-interest debt.
Cutting down high-interest debt to a more modest interest rate on a personal loan means you might be looking at significant savings each month. And that means you can use those savings to pay more toward the principal balance of your debt and get it paid off sooner. On the other hand, if your existing debt is low-interest, managing individual debt payments might be a smarter move than consolidation.
Missed Payments Are Digging You in Deeper
Managing multiple debts and various payment schedules can be a challenge. And if you’re regularly missing payments, you might be paying unnecessary money in interest and fees while also dinging your credit score a few points each time.
Taking out a loan to consolidate to a single payment is one way to ensure that you won’t risk unnecessary fees and a lower credit score. On the other hand, if you’re managing existing debt payments well and haven’t faced any fees, it might not be the right time to consider debt financing.
Your Credit Score Qualifies You for a Great Rate
Since debt consolidation loans are unsecured, lenders will review your credit score before extending an offer. And the interest rate they offer you will be based on your ability to manage credit up to that point. So if you can lock in a great interest rate that financially makes sense and will save you money, it might be the right time to take out a loan.
However, if your score is low and you’re working on improving it, debt consolidation may not be worth it until you can bring it up. Especially if you’d be facing a rate that’s higher than some of your loans.
The Bottom Line
It can be tough to know if it’s the right time to take out a loan, but the key indicators outlined above can help. If you’ve developed a financial plan to ensure you stay debt-free and your credit score qualifies you for a great rate, you may want to make a move. By getting rid of high-interest debt and managing a single payment, your path to debt freedom will be even smoother.
Brooke is a freelancer who focuses on the financial wellness and technology sectors. She has a passion for all things wellness and spends her days cooking up healthy recipes, running, and snuggling up with a good book and her fur babies.