Overwhelming debt can hold you back from milestones like throwing a wedding, buying a home, or starting a family. But it’s important to know that in some cases, you can consolidate your debt into a single payment to make the repayment process quicker and easier. That way, you’ll have a much better chance of achieving your goals.
Understanding debt consolidation and its benefits can provide an idea of how much money you could save. It can help you pay off any unsecured debt you may owe such as credit card debt, medical debt, or even personal loan debt. Let’s explore what debt consolidation is, and how it can put you on the path to a debt-free future.
What Is Debt Consolidation?
The first question you may be asking is, “What exactly is debt consolidation?”
The simple definition: having multiple debts grouped together into one new loan with a single payment each month. You then use the money you receive from the debt consolidation loan to pay off your creditors.
When you are juggling multiple credit cards, the odds are that you will be paying various interest rates. Now you’ll only need to pay back one loan at a lower interest rate and monthly payment – which makes it easier to track and pay on time.
Different debt consolidation types include credit cards, student loans, and auto loans. If you have bad credit, you can still qualify for a debt consolidation loan. However, you’ll likely pay a higher interest rate.
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Will A Debt Consolidation Loan Save Me Money In The Long-Term?
The answer to this question is generally a yes. However, if your balances are low, you could be refinancing your debt into a higher payment. When this happens, a different debt relief option would be a better fit.
With a debt consolidation loan, you will know exactly how much the monthly payment is going to cost and the total amount you owe. If you only pay the minimums on your credit cards, you will accrue interest on your interest—which could cost you hundreds or thousands of dollars in the long run. And it could take 20-40 years to pay off, depending on the amount you owe.
Are The Monthly Payments Lower?
The monthly payments on a consolidation loan tend to be lower than you might expect. You’ll save money in part because the payments are lower, but also because you will be charged a fixed interest rate that is less than the average of the multiple loans. This also means you will not have five, ten, or fifteen different credit card rates to juggle.
With a fixed rate, you’ll know for certain how much the monthly payment will cost, and you can rest assured that it won’t rise as interest rates go up. This steady rate can even help you pay off your debt sooner than you thought possible. On the other hand, a credit card’s interest rate isn’t locked in and will rise along with inflation.
High interest rates tend to take people by surprise until they start to fall into debt. Being compounded makes it even harder for people to understand and can be something that even a math whiz would struggle with.
Will These Loans Help My Credit Score?
Generally, you will find that a debt consolidation loan may slightly boost your credit score because it shows your willingness to pay off all the debt. This looks good to banks and lenders who want to know if you will honor your financial commitments. However, this can also help raise your score in a way you may have never considered. By consolidating your debt, you will only have one loan on your credit report instead of many.
Dropping down to a single account can help your credit score because the other loans will be marked as paid in full. You will probably notice that those accounts are going to start showing an available balance on them. This, in turn, shows you as having more free credit which helps boost your credit score.
Can A Consolidation Loan Help Me Pay Off My Debt Faster?
The answer to this is a resounding yes. Debt consolidation loans are typically provided on a five-to-ten-year term basis. This enables you to make payments at a fixed rate for a specific length of time. However, you will only become free of debt if you do not incur additional charges on your credit cards or other purchases as you pay off the loan.
To avoid adding to your debt, you should only purchase items that you can pay off in full right away at the end of the billing cycle—unless it’s an emergency. Of course, an auto or mortgage loan is a different story.
What Can I Do With The Extra Money?
Since you are making a lower payment at the end of the month, you may be wondering what to do with the extra money. It’s all too easy to treat yourself by going on vacation. But a better idea is to save it, especially if you don’t have an emergency fund. Paying in cash is the best way to remain debt free.
If you do plan on vacationing with the money you saved, be sure to purchase a prepaid card to cover your hotel room, food, and any other vacation expenses. Keep in mind that you should not be accumulating debt while you’re away.
Creating a retirement account and an emergency plan is essential. They will make it easier for you to retire on your terms and obtain the savings you need to cover any unexpected expenses.
Some people may feel like their debt burden will make it impossible to obtain the financial relief they need. But by knowing about the best debt consolidation options, you’re one step ahead of the game. National debt Relief is the company you can rely on to pay off your debt for less than you owe in a shorter amount of time.
