3 reasons when you should consolidate debt

  • Debt settlement can save money by moving your debt to a lower interest rate.
  • By simplifying your payments, you reduce the chance that you will miss a monthly payment, which can remain on your credit history for seven years.
  • Consider debt consolidation options like a credit card balance before taking out a personal loan.

Personal loans are a popular way for people to borrow money for a variety of reasons. Even if you should not take on extra debt for a very good reason, in some cases a new personal loan can help you become debt free.

Consolidating credit cards or other high-interest debt with a single, low-interest private loan can help you save money in a few ways. Between lower interest rates and a faster repayment period, you can stop saving a package.

A personal loan may be the right fit for you if one or more of the following situations apply:

1. You can get a lower interest rate

The single biggest rule to follow when consolidating or refinancing any debt, including student loans, is this: consolidate only if you can move your balance to a lower interest rate. Moving to a higher interest rate will cost you more in the long run.

You can imagine an interest rate as a cost per borrowed dollar per year. If you have $ 1 on a 20% APR credit card, you pay 20 cents a year for every dollar on that card. Taking out a loan over 20% means that you will pay more. Below 20% you pay less. This is the case regardless of balance.

Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have large credit, you can use it to pay off your debts at the lowest possible cost.

2. You want to make fewer monthly payments

The more credit card payments you have to make each month, the more likely you are to forget a payment. A delayed or non-payment can reduce yours


creditworthiness

for up to seven years, so you should always do everything you can to pay at least the minimum payment before the due date each month.

When you consolidate your debts, you can condense these multiple payments into one. Depending on the debts you consolidate and your APRs, your new monthly payment will hopefully be lower than all your old monthly payments combined.

You want to create a deadline for debt relief

If you have credit card debt, it is not always as clear to get a balance of zero as it is with other debt. Credit cards, for example, allow you to continue adding to your balance. If you spend more than you can pay in full each month, you will be buried in a deeper pit.

On the other hand, installment loans come with a fixed number of payments and lead to a zero balance with the final payment. Popular personal lenders offer fixed and flexible terms.

If you can convert credit card debt into an installment loan, you know exactly when your balance will be paid off. By paying off credit card debts and putting the debts on three- or five-year installment loans, the debt freedom can be just over the horizon.

Alternatives to debt consolidation of private loans

Maybe you were looking for a credit card when you still had a limited credit history, so you settled for a card with a high APR. A few years later, you have paid your bills on time and have built up a solid credit history. You may be less satisfied with your APR. With the credit you have built up, you may be able to secure a personal loan with a lower interest rate than what you are currently paying. But before you go shopping for that loan, it is worth your while to consider some options.

Call your credit card company: A painfully obvious but often underutilized strategy for lowering a credit card APR is to simply ask for one from your credit card company. While there is no guarantee that they will say yes, it does not hurt to ask, especially if you have been careful with payments.

Similarly, you can also see if your credit card company will upgrade your credit card, which may come with a lower APR and a handful of other benefits.

Consider a balance transfer: As mentioned earlier, a strategy to get a lower effective interest rate is to move the debt to a credit card for balance transfer. These credit cards usually come with an initial 0% APR period which can be anywhere from 12-18 months depending on the card. It gives you some time to pay off your debts without worrying about your payments exceeding the interest rate. However, you should be aware that you will only be able to transfer debts up to that credit limit of that card.

Debt repayment strategies: Taking out a debt consolidation loan can be impractical, but if you decide to do so, you will still be left with several debts that you are struggling to pay off. This is where debt repayment strategies come in, namely the avalanche and snowball methods.

In the avalanche method, you make all the necessary minimum payments on your credit card. You then transfer the remaining money you set aside to repay debts to the credit card account with the highest interest rate. With this strategy, you pay the least interest.

The snowball method is similar, except that you take your remaining money and target the lowest balance first. Each debt that you pay off in full frees the money from the lowest payment you would have had to pay. That money is added to this snowball when you take on the second lowest debt.

Smart credit decisions eliminate your debt

When you pay interest on a credit card, you get nothing back. Unlike mortgage debt, which gives you a home, credit card debt is likely to depend on a smorgasbord of previous purchases. When that debt accumulates interest, you end up paying more for whatever you bought with your credit card. Getting into good spending and budgeting habits can help you avoid debt in the future while paying off all the debt you have today.

Between credit cards, student loans, car loans, mortgages or rent and other monthly bills, it can feel like more of a juggling than anything else to manage your money. Making smart money decisions with a long-term focus is the best way to financial success. If consolidation can save you money while helping you achieve your long-term goals, do not hesitate to apply today.

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