Table of Content
I Don't Need Background, Take Me to the Calculator!
Nick is a typical husband, father, and busy accountant who prioritizes his family's needs. Early on, he managed to get a credit card with a $3,500 limit, followed by another with a $5,000 limit, and finally one with a $6,500 limit. At first, he had no trouble keeping up with payments on his first card.
How Debt Consolidation Works
The Longman Dictionary of Contemporary English states that this is “a loan used to pay back a number of existing loans so that payments are made only to one lender instead of to several.”
Keep in mind that it's impossible to combine all of the debt due to the following circumstances: the terms of the loans are different, they could be from various lenders, the interest rate, and so on.
You have to have a new loan in order to consolidate your whole debt. This will allow you to pay off your current, existing loans. These loans are typically smaller such as credit card balances, small loans, and so on.
Moreover, the only thing to consider is you paying back the new loan. This is definitely a better option that gives you an accurate debt number, future planning, and financial status. Banks and credit unions are the entities that typically offer this of solution.
Your credit score can influence not only your credit card rate, but also your available credit limit. This chart using Experian data shows the average credit card debt by credit score. It shows that those with an average to good credit score have the highest amount of credit card debt.
Why Consolidate Your Debt
- Better Financial Management – you have only one date to think about instead of several dates.
- Lower Interest Rate – you already saw an example of the interest amount borrowers has to pay. You need to always consider this. In a perfect world, it's great to pay off existing debt with a loan that has a lower interest rate. Am I right?
- Affordable Monthly Installment – you can see lower, monthly payments as a result of lowering your loan rate, and, if possible, extending the term of the new loan.
- Shorter Term – this is only an option if you have the opportunity to lower the rate on debt consolidation and retain the monthly installment. As a result, you are paying your loan off at a faster rate.
Debt Consolidation Examples
Example 1
Nick is an average husband and father and an active accountant. Even though he is hard-working, his family needs come first. Initially, he gets a credit card for $3,500, then another one at $5,000, and lastly $6,500. In the begging, it was no problem for him to repay what he owes on the first card.
After paying the second card, he became financially strained. The third balance was harder to pay off. It can be hard at times to juggle, different rates, payments, and dates. One thing to include is that the card with the highest rate was the third card.
What can Nick do?
Regarding debt consolidation, this is what he can do: take out a new loan to cover his existing debt and consolidate it into a monthly payment with a fixed rate. Moreover, if Nick’s credit score is pristine, he may be able to negotiate a lower interest rate on his new loan. As a result, he will have lower, monthly payments.
It's so easy, right?
Example 2
Here’s a more detailed example with calculations to give you a clearer picture.
Laure works as an office manager at a local company and has three loans. The first is a six-year $10,000 personal loan with a 12.5% interest rate. Her monthly payment for this loan is $208.70, and the total interest over the life of the loan amounts to $5,029.
In addition to the personal loan, she has two credit cards. The first card has a balance of $5,000, with a four-year term and an 8.5% interest rate.
Moreover, these results come out to her paying $123.20 each month totaling $915.60 in interest for the whole period. The third credit card loan totals out to $7,000 for a five-star period at 10.5%. For this card, her monthly payment totals out to $150.50 with an interest rate of $2,027 over the whole term. This is just barely a quarter of the amount of what she has to pay.
In this scenario, Laure’s total principal debt is $22,000. In addition, her monthly overall payment is $482.40 and the total interest on her loans is $7,971.60.
Her advantages are that she pays her monthly payments consistently, and she has a very good credit score. This persuades the lender to cover her with a debt consolidation loan of $22,000 a 7.5% over a five-year period. Her monthly installment comes out to be $440.80. Laure’s principal of $22,000 stays the same. She only has to pay $4,450 in interest.
The result:
As of result, she manages to reduce both her monthly payments and the interest rates she has to pay on the new loan.
Debt Consolidation Pros
Debt consolidation loans are a lifesaver to many. There are so many people that can't even progress in life because they have so much debt. On top of that, their interest rates are so high to where they can't renegotiate better terms.
Have you been harassed by collection agencies recently?
If so, then you more than likely owe more than $10,000 to various lenders and you have debts that are way overdue. If you decide to get a debt consolidation loan to pay off your current debt, then the calls will end.
More than likely, you are considering this move in order to get rid of overdue payments on various loans, which means your credit rating is being affected in a negative way.
Do you want to improve your credit score?
Paying off the principal on your new loan can import your credit score. If you need to discover your credit score, learn how to find out.
Need a break from taxes? If you succeed in securing a loan with an asset, bonus points if it's your home, you can qualify for a tax reduction.
Debt Consolidation Cons
Remember, there isn't a perfect way to achieve anything. Even though something appears to look good on the surface, there are some things you need to take into consideration before getting a debt consolidation loan.
These types of loans can carry a higher rate at times. If you don't do the math, it's more than likely that you will pay more each month, and repay the debt longer than expected. As a result, your debt ratio increases. It seems like double the trouble to me. Furthermore, always remember to consult your financial advisor in order to prevent big setbacks in the future.
Also, keep in mind to not borrow more than what you need. Even though you desire a new car or bigger house, the question is can you afford it. Don't all debt consolidation to be a tool of injustice. Use this tool to your advantage and pay off your debts instead.
Best Methods To Consolidate Debt
There isn’t just one way to get a debt consolidation loan or to pay off your debts. The interest you have to pay is quite expensive.
Moreover, there are a number of ways you can get a debt consolidation loan. Next, we're going to discuss the main ways US citizens obtain debt consolidation loans.
Balance Transfers On Credit Cards
More than once, we come to find out that we owe debts on our credit cards. Stuff like this happens in life from time to time. For instance, an emergency arises and you have to use your credit card to cover expenses. Scenarios like this are even more difficult for multiple card users attempting to stay in the green.
A good way to prevent this from happening is to transfer your balance on your credit cards to one new account.
Home Equity Loan
Most people consider this a second mortgage.
In a nutshell, this is process is using your house as collateral to get the loan in order to ensure the lender that you will pay back your loan. Even though this seems as though it’s a good idea, it’s quite risky. Above all, pay attention to details and ask the right questions!
Most people who acquire these loans have excellent credit. Moreover, the worth of their home is quite big if they are able to get this type of loan. The main benefit of this type of loan is having a low-interest rate. Moreover, you’re not accumulating a too much more than what you currently owe, just a small amount of it. You also have the option to invest more money into your house and qualify to receive more money.
It’s always good to careful though. Remember, this method puts your property in jeopardy if you are unable to pay back your loan. The result is foreclosure. Just knowing what can happen is humbling enough. If you currently know someone who is going through a foreclosure, you know the pain that it brings. On the other hand, it does have low interests. Just be careful; especially for those of you who have a family.
Remember:
You are trading your house in order to get the loan. This is a dangerous venture for those who aren’t confident they can pay the loan off. the consequences not paying the loan is that you can lose your house as well as be taken to court to pay the loan back. A situation like this can ruin someones like. Take this situation seriously. In your spare time, research what others’ experiences of the pain of going through a foreclosure.
Credit Lines
A line of credit can also help pay off your debts. Most banks and credit unions can help you get a line of credit. The main requirements are to have a steady income and a good credit score. Hone these advantages for your situation.
Also, monitor your credit score and make sure it is pristine.
Why?
Doing this brings clarification on whether or not you qualify for a line of credit. Moreover, it also helps you make a clear decision to look for a lender or not. For instance, if you have okay to bad credit, you won’t get approved. Most lenders want 100% confidence in the individual they loan out to. They normally don’t like taking risks. If you do get approved with oaky credit, the lender can increase your interest rate exponentially. Moreover, it may not be worth applying in the first place.
Keep in mind:
If you just have okay credit, you will have a high-interest rate by the lender. I wouldn’t even try to get a line of credit in the first place. Also, be aware that paying a high interest costs more in the long run.
Debt Repayment Programs
There are various programs that help people get out of debt. This is a good option if you can’t gain approval elsewhere. These types of programs offer promises 0% interest, and a plan to get you out of debt with a few years or so. Moreover, they will combine your payments into one big one.
As I’ve said previously, this is a good option and can save you plenty of time long term. Above all, be careful in dealing with any kind of loan. Scams on people happen all the time on these types of ventures. Speaking with a non-profit credit counselor is a smart thing to do.
Choose Your Loan
You should invest a lot of your time contemplating if you need a secured loan or not. Even though these can be beneficial, they also have a risk factor you can’t ignore down the road. For instance, these are not a good option for those who don’t pay off bills on time. on the other hand, they are beneficial for those who do.
Even though these two types of loans have low-interest rates, they are very risky ventures.
Overall, there are programs that have free services for those who desire to walk in financial freedom and be debt free.
Calculator Definitions
Cost Of Debt Calculator – Definitions
Use minimum payment
If you checked the “use credit card minimum payments” box, your monthly payment is calculated as 4% of your current outstanding balance. With the “use credit card minimum payments” box checked, your monthly payment will decrease as your balance is paid down. This can greatly increase the length of time it takes to pay off your credit cards. Uncheck this box to enter your own monthly payment that will remain the same until your balance is paid in full.
(We calculate your minimum monthly payment as 4% of your current outstanding balance. While your actual minimum monthly payment may be slightly different, this is one of the most common methods used by credit card companies to calculate minimum payments.)
Credit Card Balance
Your total current balance for this credit card.
Credit Card Interest rate
The annual percentage rate you pay for this credit card. The rate you enter is used to calculate the interest on all future credit card payments. The length of time to pay off this credit card may be much greater than calculated if you enter a low promotional interest rate that is only good for a short period of time.
Credit Card Payment
This is your initial monthly payment. If you checked the “use credit card minimum payments” box, your monthly payment is calculated as 4% of your current outstanding balance. With the “use credit card minimum payments” box checked, your monthly payment will decrease as your balance is paid down. This can greatly increase the length of time it takes to pay off your credit cards. Uncheck this box to enter your own monthly payment that will remain the same until your balance is paid in full.
(We calculate your minimum monthly payment as 4% of your current outstanding balance. While your actual minimum monthly payment may be slightly different, this is one of the most common methods used by credit card companies to calculate minimum payments.)
Loan balance
Your total current balance for an installment loan.
Loan interest rates
The annual percentage rate you pay for this loan. Enter the current interest rate for this loan. This calculator assumes your rate will remain the same for the entire repayment period. We use this to calculate the interest you will pay on this loan and the number of payments that are remaining.
Loan payment
This is your monthly payment. Enter the actual monthly payment for your loan. We use this to determine your payment totals and to calculate the remaining payments.
Remaining loan payments
This is the calculated number of payments remaining for this loan. It is based on your current balance, payment and interest rate.
