Debt consolidation is using one loan or credit card to pay off multiple loans or credit cards so you can simplify your debt repayment. With one balance instead of many, it should be easier to pay off your debt and, in some cases, secure a lower interest rate from the lender.
How Debt Consolidation Works
Let’s say you have multiple small loans with different interest rates and monthly payments:
Credit card A: $3,500, 24.90% APR
Wedding LoanB: $2,500, 18.90% APR
Payday Loan C: $1,500, 12.00% APR
Rather than paying these balances individually, you can consolidate all three balances with a single loan that requires one payment instead of three. For example, if you consolidate these balances into a $7,500 loan with 7.00% APR and pay off the loan in four years, you’d pay $1,120.80 in interest. By comparison, if you made a 4% monthly minimum payment on each loan, it would take more than $5,440 in interest payments and 12 years to completely pay off the debt.
Types of Debt Consolidation
There are a few methods you can use to consolidate your debt. Your options may be limited depending on the type of debt, your credit standing, and any real estate assets you have.
Credit Card Balance Transfer
A credit card with a high credit limit and a promotional interest rate on balance transfers is a good candidate for consolidating other high interest rate credit card balances onto a single credit card. Combining your balances under an interest rate that’s lower than the average rate of your existing balances allows you to save money on interest and pay toward one credit card instead of several.
Advantages of Debt Consolidation
- The average American cardholder has 7 credit cards. In a two-parent household with other debt obligations for a car loan, student loan or mortgage, the household debt payments add up quickly. When there isn’t enough money to pay off all these debts in full, deciding how much money to allocate to each debt can be a difficult juggling act, one that is repeated every month. Consolidating debt can provide an easier management process, resulting in a lot fewer transactions to track.
- With so many debt payments, it is easy to miss one every once in a while, even with the best intentions. Missing a single minimum payment by just a few days can result in penalties and fees.
- For some borrowers, debt issues can create an overwhelming situation internally. Getting into debt beyond means of repayment can have serious effects on your emotional well-being. Being able to take control of your debt rather than letting your debt control you can relieve some of this stress and have a positive effect on your mental health.
- Simply taking less time to pay your bills every month and having the confidence that nothing has been forgotten can be a big stress reliever. Various polls indicates that nearly one-quarter of American cardholders are surprised at least sometimes by a larger than expected credit card bill. Having a clearer picture of your financial situation and confidence that you have a well-defined path forward can be easier when you have fewer debts to manage. Seeing regular progress on debt reduction can be a big motivator to help you take additional positive action.
- Avoiding the stress of poor debt management can even have positive physiological benefits. Stress has been linked to the worsening of health conditions including obesity, heart disease, Alzheimer’s disease, diabetes, depression, gastrointestinal problems, and asthma. Reducing stress can make you feel better not only mentally, but also physically.
LoanTodayUSA has options to reduce your overall interest payments and make your life easier – consolidate your debt today!