Debt consolidation exists to help a borrower pay off multiple high-interest debts. Usually, the debts in question are unsecured. Rather than making payments toward multiple debts each month, the borrower instead takes out a loan, uses the loan to completely pay off each of the debts, and then makes single monthly payments toward the loan.
How does debt consolidation work?
Debt consolidation can be a powerful tool for paying off debts. By merging loans into a single payment with a lower annual percentage rate (APR), the borrower can lower his or her monthly payments, in addition to the overall amount that will be paid out for the debts. The key to effective debt consolidation is to look for a loan with a low APR. The lower the APR, the greater your savings will be in both the short term and the long run.
For example, suppose you have three credit cards:
● Credit card 1 has a balance of $5,000, an interest rate of 15.9%, and a minimum monthly payment of $245
● Credit card 2 has a balance of $10,000, an interest rate of 20%, and a minimum monthly payment of $509
● Credit card 3 has a balance of $1,000, an interest rate of 18%, and a minimum monthly payment of $50
This means that your total credit card debt is $16,000, and your total monthly payment toward your debts is $803.
Those credit card debts could be consolidated by taking out a $16,000 loan and then using the loan to pay off the credit cards. If you get a loan with an interest rate of 7.5% with a two year repayment period, then your new monthly payment drops from $803 to $720.
This will save you $83 a month. This monthly savings adds up to a total of $2,003 when you consider how many payments you will make toward your debt. For those with greater amounts of debt that accrue higher interest rates, the savings will be even bigger.
Credit card debts are not the only debts eligible for consolidation. Other types of debts that may be eligible for consolidation include:
● Medical bills
● Student loans that are not federally insured
● Unsecured personal loans
● Payday loans
● Personal lines of credit
● Utility bills
● Cell phone bills
Getting Started with Debt Consolidation
If you are curious about debt consolidation, you should consider setting up a consultation with a debt consolidation company. These consultations are free, which means you can get the information you need without having to pay an upfront fee.