When to consolidate your debt with a personal loan or refinance
- Debt consolidation deals are a dime a dozen, but strategic consolidation with a personal loan can help you save money and simplify your finances.
- A missed credit card or monthly loan stays on your credit for seven years, and simplifying your payments reduces your chances of error.
- Consolidating into a higher interest rate loan will cost you more, so always compare the numbers when deciding on a new personal loan at consolidate debt.
Personal loans are a popular way for people to borrow money for a wide variety of reasons. While I’m usually not a fan of taking on additional debt without a very good reason, in some cases a new one. Personal loan can help you get out of debt.
Consolidation of credit cards or other high interest debt with a single low interest personal loan can help you save money in several ways. Between lower interest rates and a faster payback period, you could end up saving a bundle.
A personal loan may be right for you if one or more of the following situations apply:
1. You can get a lower interest rate
The most important rule to follow when consolidating or refinance any debt, even student loans, is this: Only consolidate if you can move your balance to a lower interest rate. Switching to a higher interest rate will cost you more in the long run, not less.
You can think of an interest rate as a cost per dollar borrowed per year. If you have $ 1 on a 20% APR credit card, you’ll pay 20 cents a year for every dollar on that card. Going for a loan greater than 20% means you will pay more. Below 20% you will pay less. This is the case regardless of the balance.
Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have good credit, you can take advantage of it to pay off your debts at the lowest possible cost.
2. You want to make fewer monthly payments
If you have half a dozen credit card payments owed each month, it’s easy to miss a payment due date or make some other stupid mistake. A late or missed payment can lower your credit score for up to seven years, so you should always do everything possible to pay at least the minimum payment by the due date each month.
When you consolidate your debt, you end up with one payment instead of several. Depending on the debts you consolidate, your new monthly payment may be lower than your old combined monthly payments.
3. You want to create a debt release deadline
If you have credit card debt, achieving zero balance isn’t always as clear as with other debt. Installment loans, for example, have a fixed number of payments and lead to a zero balance with the final payment. Credit cards allow you to keep increasing your balance. If you spend more than you can pay in full each month, you are going in the wrong direction.
Popular personal lenders offer fixed and flexible terms. If you can convert credit card debt to an installment loan balance, you’ll know exactly when your balance is paid off.
When I worked as a bank manager, I helped a few clients consolidate multiple debts into one loan with just one monthly payment. By paying off credit card debt and placing the debts in three or five year installment loans, debt freedom might be just on the horizon.
Smart credit decisions eliminate your debt
When you pay interest on a credit card, you don’t get anything in return. Unlike mortgage debt, which gives you a home, credit card debt is likely due to a multitude of past purchases. Adopting good spending and budgeting habits can help you avoid debt in the future while paying off any debt you have today.
Between credit cards, student loans, car loans, mortgage or rent, and other monthly bills, managing your money can seem like more of a juggling act than anything else. Making smart financial decisions with a long-term view is the best route to financial success. If consolidation can save you money while helping you achieve your long-term goals, don’t hesitate to take advantage of this app today.