- Debt-consolidation offers are a dime a dozen, but a strategic consolidation can help you save money and simplify your finances.
- A missed monthly credit card or loan payment stays on your credit for seven years, and simplifying your payments lowers your odds of a mistake.
- Consolidating to a higher-interest loan will cost you more, so always compare the numbers when deciding on a new personal loan to consolidate debt.
- Visit Business Insider’s homepage for more stories.
Personal loans are a popular way for people to borrow money for a wide range of reasons. While I’m generally not a fan of taking on extra debt without a very good reason, in some cases a new personal loan can help you get out of debt.
Consolidating credit cards or other high-interest debts with a single, lower-interest personal loan can help you save money in a couple of ways. Between lower interest rates and a faster payback period, you could wind up saving a bundle.
A personal loan could be the right fit for you if one or more of the following situations applies:
1. You can get a lower interest rate
The single biggest rule to follow when consolidating or refinancing any debt, even student loans, is this: only consolidate if you can move your balance to a lower interest rate. Moving to a higher interest rate will cost you more in the long-term, not less.
You can think of an interest rate as a cost per dollar borrowed per year. If you have $1 on a credit card at 20% APR, you will pay 20 cents per year for every dollar on that card. Going to a loan above 20% means you’ll pay more. Below 20%, you’ll pay less. This is the case no matter the balance.
Most personal loan interest rates are based on a combination of market interest rates and your personal credit history. If you have great credit, you can leverage it to pay off your debts at the lowest possible cost.
2. You want to make fewer monthly payments
If you have a half dozen credit card payments due every month, it’s easy to miss a payment due date or make another mindless mistake. A late or missed payment can drag down your credit score for up to seven years, so you should always make every effort to pay at least the minimum payment by the due date each month.
When you consolidate your debts, you’ll wind up with one payment instead of multiple. Depending on the debts you consolidate, your new monthly payment might be lower than your old monthly payments combined.
3. You want to create a debt freedom deadline
If you have credit card debt, getting to a zero balance isn’t always as clear as it is with other debts. Installment loans, for example, come with a fixed number of payments and lead to a zero balance with the final payment. Credit cards allow you to keep adding to your balance. If you spend more than you can pay off in full each month, you are taking yourself in the wrong direction.
Popular personal lenders offer fixed and flexible terms. If you can convert credit card debt into an installment loan balance, you’ll know exactly when your balance will be paid off.
When I worked as a bank manager, I helped a few customers wrap up multiple debts into a single loan with a single monthly payment. By paying off credit card debt and putting the debts into three- or five-year installment loans, debt freedom could be just over 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 smorgasbord of past purchases. Getting into 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, auto loans, mortgage or rent, and other monthly bills, managing your money may feel like more of a juggling act than anything else. Making smart money decisions with a long-term focus is the best path to financial success. If consolidating can save you money while helping you achieve your long-term goals, don’t hesitate to turn in that application today.
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