- Personal debt consolidation loans help eliminate debt by converting high-interestrevolving accounts into a fixed-term loan.
- Debt consolidation loans generally have a fixed rate, which does not increase even if interest rates rise.
- A single monthly payment makes it easier to manage large amounts of debt.
Credit card debt is one of the most problem aticbills to eliminate. Companies charge exorbitant rates and then tease you with low monthly payment requirements that barely cover the interest. Making the minimum payment keeps you perpetually in debt and could take over 30 years to pay off.
Personal debt consolidation loans are a popular strategy to eliminate high credit card debt levels. To pay off debt, you transfer existing balances to a single loan giving you one payment. The new loan has a set term and fixed interest rate, making your payment predictable and manageable.
Below are four significant benefits of debt consolidation loans:
Single Monthly Payment
Debt consolidation loans transfer multiple debts into a single loan with one monthly payment. If you manage existing balances but struggle to keep up with different payment schedules, a consolidation loan can simplify the repayment process and make it easier to pay off debts.
May Lower Your Monthly Payment
In some cases, a consolidation loan will reduce the amount you owe each month. The payment is primarily driven by the total loan amount, interest rate, and loan term. The longer the loan duration and the lower the interest rate, the lower the monthly payment.
May Drop Your Interest Rate
It is necessary to have decent credit and enough income to qualify for a new loan. The interest rate a lender offers is directly related to your verifiable income and credit quality. While some lenders will work with you even if your credit is less than perfect, the rate may or may not be lower.
Besides the actual rate, loans provide a fixed interest. In a period of rising interest rates locking in your rate could reduce the amount you pay overtime. Once the loan closes, you will have the same interest and monthly payment for the life of the loan.
Credit cards charge interest based on a margin against prime. For example, if your contract lists your rate as prime + 15% and prime is 3%, your rate will be 18%. As the federal reserve raises rates, credit card interest charges on existing balances increase the following month.Even if it is not lower than your credit cards initially, a fixed rate could save you money because it will never increase regardless of what happens in the market.
Reduces the Time to Payoff Existing Debts
Debt consolidation loans could save you money even if you do not qualify for a better interest rate. The shorter loan term could save you thousands of dollars in interest because you pay off the debt faster. Personal loans typically last from one to seven years, where paying the minimum on high-interest credit card debt can take 30 years or more to pay off.
Reducing the payoff time can allow you to become debt-free in a few years because the payment reduces the principal balance rather than mostly paying interest.
Final Thoughts
Personal debt consolidation loans have many benefits and could allow you to eliminate debt faster. The benefits you receive largely depend on the current state of your credit and your ability to secure favorable loan terms. You should also calculate the total cost over the duration of the loan versus leaving balances on high-interest credit cards to determine what benefits you will receive.
