Between different interest rates, due dates, loan types, and financing options, handling debt can seem complicated – and perhaps some of this is intentional. If the lender can keep you confused and frazzled for long enough, it means big money for them. Regardless, there are many different types of loans and it helps to get acquainted with how they work.
If this rings any bells for you, it might be a good time to consider the possibilities of debt consolidation. This involves taking some or all of your outstanding debts and combining them into a single, larger piece. Usually, this comes with favorable interest rates.
Debt Consolidation Explained
Thanks to the flexibilities of debt consolidation, you are often allowed to avoid high interest rates, as well as high monthly payments that you cannot afford. Your old debts will be replaced by a new one with new terms, but be careful to choose the right one.
Ways You Can Use Debt Consolidation To Your Advantage
Lowering interest rates is among the biggest perks of debt consolidation. Personal loan rates average around 10.13%, which is lower than the average APR for credit cards, which tends to hover around 14%. In effect, this saves you upwards of $3,000 over a few years.
Some services allow the borrower to optimize their personal student loans with credit cards, which offer cash, travel points, and even rewards for good grades. This can be a great alternative for a person looking to streamline their student debt situation, which can get extremely messy in years during and after college.
Attaining a lower interest rate on debt consolidation can be easy, but it helps if you have good credit. Take a look into your credit score to see how you rank and understand just how your credit score is calculated so you know for the future.
To see what works best for you, get a few quotes from several lenders that are personalized for you. This can help to reduce your long-term interest rates.
Improving Monthly Payments
Debt consolidation can be a great opportunity to improve your monthly payments. Trading all your monthly bills for one can take an enormous amount of headache out of the process. Choosing a longer repayment plan or a lower interest rate can make a big difference in your monthly expenses.
Be careful, however, because some borrowers can end up paying more per month with a consolidation plan than they did before. For example, choosing a loan term of two or three years likely will increase the amount you pay for your monthly minimums.
Changing A Payoff Date
The longer your loan term, the less you will have to pay each month. On the flip side, a shorter loan term will mean higher monthly payments but also a quicker route to debtless freedom. Likewise, the duration of your loan will determine the interest rate. Shorter durations generally offer a more favorable interest rate than a longer loan term one.
For this reason, it helps to do the math to see if it’s worth it to extend your loan. Thankfully, there are a number of resources available at your fingertips, like loan calculators. Taking a few minutes to figure out what is optimal for you can save you lots of money in the long term.
Things To Avoid In Debt Consolidation Loans
The world of debt consolidation is a business, and therefore there will be entities looking to make some money off of you. It might make sense to lump everything into one payment, but sometimes the convenience comes at a large cost. Below, we will discuss things to watch out for in regard to debt consolidation.
Dangers of Debt Consolidation Services
Services that advertise as an aid to your consolidation can be costly, and present a high potential to scam you. There is essentially nothing you can’t do without them for less (or for free).
Don’t Forget Origination Fees
In addition to the interest you are paying, many lenders will tack on an origination fee. These can range from one to six percent of the total loan cost. Generally, these fees are taken out of the initial amount you are given. You should make sure you are borrowing an amount that covers both the debt you are consolidating and the origination fee.
Since not all lenders will charge this fee, it might be worth it to shop around and opt for a loan without an origination fee. In addition, you should compare APR rates, as sometimes a lender will have such a favorable rate that it becomes worth it – even with the origination fee.
Stop Borrowing As Soon As Possible
Ending the cycle of borrowing money is ultimately up to you, and should be done as soon as you can. Consolidating debt should entail the responsibility to strategize your plan of action. This will get you out from under the pressure of debt as soon as possible.