Most of us know how difficult it is to make ends meet.
Stack of monthly bills covering your table. Debt notices on your fridge. Numbers that just don’t add up. It would seem like you’ve reached the end of your financial rope. It’s frustrating, but there’s hope.
You can try looking for a debt consolidation loan.
This article aims to enlighten you about the basics of debt consolidation and whether or not it may work in your situation.
Understanding Debt Consolidation
Debt consolidation is a type of refinancing solution that makes it easier and faster to pay off your debt. With this method, your outstanding debts are combined or ‘consolidated’ into a single loan with a more favorable monthly payment-a lower monthly payment, lower interest rate, or both.
Most debt consolidation loans also have fixed-rate installment loans. This means the interest rate never changes, allowing you to make a single, consistent payment every month.
So, let’s say you have five credit cards with different minimum payments and interest rates.
- Card 1: USD$2,000 balance with 15% interest
- Card 2: USD$9,000 balance with 18% interest
- Card 3: USD$1,000 balance with 10% interest
- Card 4: USD$7,500 balance with 20% interest
- Card 5: USD$3,500 balance with 15% interest
If you were to pay down these balances over 24 months, the total cost of interest would be USD$4,450.
Now, let’s say you were able to get a 24-month personal loan for the total amount you owe, which is USD$23,000 with a 15% annual percentage rate (APR). If you pay off the loan in two years, you’ll only pay USD$2,166 for interest.
Not only can you save almost half of the interest, but you also get to manage a single monthly payment instead of five. Keeping track of several payments to different creditors can be difficult. So, by consolidating your loan, you can simplify the process and reduce the likelihood of missing a payment.
Most people can apply for a debt consolidation loan via their bank, credit card company, or credit union. These are a good place to start, particularly if you’ve already established a good payment history and relationship with your financial institution.
However, if they turn you down, you can also explore private mortgage businesses or specialized debt consolidation service companies like Auckland Loans.
Three Ways To Consolidate Debt
There are several options to consolidate your debt, depending on the amount and type of debt.
1. Balance Transfer
Most credit card providers offer a balance transfer card and promotional periods with 0% interest on these cards, making them appealing. However, it may not be available to you, depending on your credit score.
It allows you to transfer your balance from multiple cards into a single card and make payments at 0% interest during the introductory period. But before you make a balance transfer, you need to understand how the new card will charge interest. Take note that there’s also a transfer fee added to your total balance.
2. Personal Loan
A personal loan for debt consolidation is provided by numerous lenders, including credit unions, banks, and online lenders. In general, personal loans are unsecured, which means your lender doesn’t ask for collateral. However, this could result in a higher interest rate and fewer funds available for the loan.
Before you move forward with a personal loan for consolidating your debt, make sure to understand its terms and fees, which tend to increase the total amount you have to pay back.
3. Home Equity Line of Credit
A home equity line of credit (HELOC) is another option for debt consolidation. However, it may be a risky option since it requires you to put up your home as collateral. If you can’t pay the loan, you’ll lose your home.
However, what makes HELOC appealing is the lower interest it offers compared to other debt consolidation options. In general, banks will allow you to borrow up to 80% of the home equity.
So, if you have USD$100,000 in equity, you can borrow USD$80,000 to pay off your credit cards and other debts.
Should You Use Debt Consolidation?
Debt consolidation may be a wise financial decision under the right circumstances. However, it’s not always your best bet. That said, here are some signs when debt consolidation makes sense:
- You can lower the overall interest rate of your debt by 8% or less.
- You have a steady income that’s higher than your monthly expenses.
- The payments for your debt consolidation reduce the balance you owe every month.
- It allows you to pay off your chosen route in less than five years.
- You have a high credit score that qualifies you for lower interest rates.
Takeaway
Your financial situation plunging into the abyss is a nightmare. It can be an unexpected life event such as a serious health issue or as simple as reckless spending. Even those who practice strict financial management may find themselves backed into a corner. In such desperate situations, debt consolidation can become a lifesaver.
