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Debt consolidation puts multiple debts into one single monthly payment. It's a great way to consolidate 3,4 or even 10+ monthly payments to one account. Even better if you qualify for a low interest rate. Debt consolidation loans are designed to reduce your overall or total debt amount and reorganize it. So, you can control it and pay it off faster.
The first step to consolidating debt is to determine how much debt you plan to consolidate and how much you can afford to pay off each month. Let's say you currently have $15,000 in credit card debt spread over three credit cards, each with 18.35% APR.
One credit card has an outstanding balance of $3,000, another of $7,000 and the third of $5,000.
Assuming you make equal payments on your credit cards, with a $15,000 loan at 12.92% APR and a 48-month term, you could save $3,207 in interest by moving over your debt from your credit cards.
Taking 3 monthly credit card payments down to one loan payment.
Believe it or not, we get this question quite often. To sum this up for you, Instead of multiple monthly payments. With each having different interest rates and fees. You now just have one! You'll receive the money as a loan, use it to pay off your other credit lines. Then you'll only have to pay the loan payment each month and not the credit cards or other debts.
Success with a consolidation strategy requires the following:
Here's a scenario when consolidation makes sense: Say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You might qualify for an unsecured debt consolidation loan at 7% — a significantly lower interest rate.
For many people, consolidation reveals a light at the end of the tunnel. If you take a loan with a three-year term, you know it will be paid off in three years — assuming you make your payments on time and manage your spending. Conversely, making minimum payments on credit cards could mean months or years before they're paid off, all while accruing more interest than the initial principal.
Consolidation isn't a silver bullet for debt problems. It doesn't address excessive spending habits that create debt in the first place. It's also not the solution if you're overwhelmed by debt and have no hope of paying it off even with reduced payments
If your debt load is small, you can pay it off within six months to a year at your current pace and you'd save only a negligible amount by consolidating, don't bother.
Try a do-it-yourself debt payoff method instead, such as the debt snowball or debt avalanche.
If the total of your debts is more than half your income, and the calculator above reveals that debt consolidation is not your best option, you're better off seeking debt relief than treading water.
Typically, unsecured debt can be consolidated with a personal loan. While it varies lender to lender, some types of debt, such as mortgages or car loans, might not be able to be consolidated with a personal loan.
When you consolidate debt, you pull several levers at once that help or harm your credit. Here are some short-term causes of a credit score drop when consolidating debt:
But it isn't all bad. Here are some positives for your credit scores from a debt consolidation:
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