Thinking About a Debt Consolidation Loan in 2025? Here’s What to Know | CC of Minnesota
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Thinking About a Debt Consolidation Loan in 2025? Here’s What to Know

As the new year gets fully underway, you might be thinking about paying down your debt with a debt consolidation loan. But it’s a good idea to understand how it works and other options available to you, like a debt management plan (DMP). Both programs are designed to help you manage your debt more effectively and simply, but there are differences you should consider as you move forward with repayment. 

 

Understanding Debt Consolidation Loans

A debt consolidation loan is a loan you apply for to consolidate debts like medical bills, credit cards, or auto loans into one monthly payment. If you have good credit, you may get a lower interest rate, helping you pay less overall. A debt consolidation loan simplifies the repayment process and is helpful for your credit utilization (the amount of credit you’re using versus what you have available). Since credit utilization is 30% of your credit report, this is typically good for your credit score. 

However, like any loan, you have to be approved. If you have bad credit, you will likely be denied or you’ll end up with a high interest rate, costing you more over time. Plus, if you don’t get approved for the whole amount, you’ll still wind up paying to multiple lenders, raising your risk of defaulting. While there’s flexibility with a debt consolidation loan, it doesn’t help fix bad spending habits. 

 

Why Choose a Debt Management Plan?

To enroll in a debt management plan, you’ll work with a certified credit counselor through a credit counseling agency. Your counselor will negotiate with your creditors to consolidate your debt into one monthly payment while reducing your interest rate. DMPs are designed to help you pay off your debt in three to five years. During that duration, a credit counselor will help you create a budget and plan for the future while also addressing bad spending habits. With regular repayment, your credit score will go up over time. 

While a debt consolidation loan provides more flexibility, a DMP provides counseling and support to address the root of the problem without taking out another loan and risking defaulting on payments. 

 

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