- Transferring balances is not the same as paying off debt. A new loan can help manage your credit but does not reduce the amount you owe.
- Personal debt consolidation loans can assist with debt elimination without damaging your credit.
- The amount you save through debt consolidation will depend on the rate, loan term, and fees associated with the new loan.
In 2021, inflation not only made things more expensive but led to the largest levels of borrowing in 14 years. Debts loads grew by over $1 trillion in 2021,with credit card balances ballooning by $52 billion in the fourth quarter. Consumer spending remains robust,pushing debt to unprecedented levels due to the highest inflation seen in 40 years.
When credit card bills and other unsecured debts become overwhelming because you have too many accounts or owe too much money, a personal loan can help get debt under control. A consolidation loan reduces bills to a single payment. The result is one loan featuring a fixed rate and term with a predictable monthly cost.
While personal loans can simplify your finances, there are several things you need to know before consolidating debt.
Trading one loan for another does not pay off debt: Personal loans allow you to transfer balances but do not reduce the amount you owe. It is a popular choice because it makes it easier to eliminate debt by simplifying payments and lowering costs through a shorter loan term and/or a lower rate.
Spending habits do not automatically change just because you free up cash in your budget. Before consolidating debt, review your spending habits. You can often make small changes to prevent a repeat.
Budgeting can make all the difference. Budgets get a bad rap but are an essential tool to gain control over your money. A budget allows you to prioritize expenses and direct funds to the highest priority items when used correctly. The process begins with an evaluation of where your money goes. Scrutinizing spending often identifies areas of adjustment, freeing up funds for your top financial priorities.
Focus on the big picture. Finances do not operate in isolation. You develop spending habits over your lifetime. Earmark savings to another financial goal when you save money through debt consolidation.
How does debt consolidation impact your credit? Personal debt consolidation loans do not negatively impact your credit. Your score could increase because the transfer of revolving accounts to a loan can lower your utilization ratio.
What is the new payment? The monthly payment is a major indicator of affordability. Stretching your budget to pay off debt faster could create a financial hardship. If the new amounts trains your budget, consider eliminating debt in smaller stages.
How will you save money?Aside from simplifying your finances, the goal of consolidation is to reduce costs. Before accepting a new loan, calculate your savings by comparing the new loan terms and fees with your current interest rates.
The length of the loan also affects the amount you save. Leaving balances on a credit card and making the minimum payment could take 30 years or more to eliminate the debt and lead to paying three times the original charges. A shorter loan term can save thousands in interest, even if you cannot qualify for a lower rate.
Lastly is the interest rate charged over the life of the loan. Credit card interest rates are variable, increasing every time the Federal Reserve raises rates. A consolidation loan locks in the rate. With the Federal Reserve committed to raising rates at least six more times in 2022, a fixed rate could save you a significant amount in interest.
