If you’re in debt and looking for a way to make it a little easier on yourself, debt consolidation may be right for you. So why should I consolidate my bills, and how can it help me get out of debt?
What is Debt Consolidation?
Debt consolidation can encompass a variety of different methods that are used to roll several high-interest debts and repackage them into one loan. This process involves a borrower finding a lender that’s willing to pay off outstanding loans on their behalf, beginning a mutually beneficial relationship between the two. The borrower can reap a multitude of benefits, and the lender charges interest on the balance due. Many borrowers will actually end up paying a reduced rate through this process. So how exactly does that work?
Lower Your Interest Rates
If you or someone you know has been in credit card debt before, then you’ll no doubt be familiar with the sky-high interest rates credit card companies often charge. Although the rate varies between lenders, the average rate borrowers end up paying is around 18%, and leaving these accounts open can end with you paying multiples on what you originally borrowed. Depending on several key factors, like the interest rates of the accounts you’ll settle, your type of loan, and your credit score, with bill consolidation, you’ll potentially see a massive reduction in the interest rate you’ll be paying. This lower interest rate is only one of the benefits of debt consolidation that lets you start chipping away at your debt sooner than expected. Another benefit is the time you’ll be able to save from the simplification of the payment process.
Make Your Monthly Payments Simple
After you’ve gone through the consolidation process, you’ll be able to make one payment each month rather than paying off card after card. This enables you to cast away the stress of going from website to website, and opening envelope after envelope, trying to figure out if you’ve paid this or that bill each month. Not only does this make your life easier, but it also adds back valuable time to your day that you can spend on something you enjoy. Debt consolidation also offers the potential to save money over the lifetime of your loans.
By consolidating your higher interest rate debts into one lower interest loan, you’ll have the opportunity to save a significant chunk of cash compared to leaving it all on the card. A $20,000 dollar credit card bill for example, at 18% interest, would end with you paying $500 dollars a month, and incurring $10,000 dollars worth of interest, bringing the total up to $30,000 after 5 years. Reducing those loans into one with 10% interest, however, would only incur about $5,500 worth of interest over the same time period, and actually require less each month to be paid back. Depending on the type of loan you’re able to get, your savings could be even higher.
What Types of Loans are Available?
While there are quite a few ways to engage in debt consolidation, they all exist in one of two categories. Secured and unsecured. A secured loan is one in which the borrower is backing the loan with an asset that functions as collateral, this will almost always result in a lower interest rate, as the loan is much safer for the lender. An unsecured loan is the opposite and is generally based on the borrower’s credit rating and history, with a higher credit rating usually resulting in better terms for the borrower. Both types of loans could have the potential to help you save money in the long run, and help you claw your way out of debt. And if you came looking for the answer to “Why should I consolidate my bills?” hopefully you’ve got the answers you needed.