- A personal debt consolidation loan can eliminate debt faster and for less money.
- The three terms that determine the level of savings include fees, interest rate, and loan length.
- Lenders offer loan terms primarily based on income, credit, and access to collateral.
- The better your credit and lower the debt-to-income, the cheaper the loan and the more you can save.
Too much debt strains your finances and can impact other areas of your life. You might worry about the size of your monthly payments, consider taking a second job to keep up with the bills, or argue over spending with a loved one. The additional stress may cause you to rethink your finances.
High debt loads, especially when minimum payments put a strain on your budget, indicate that immediate changes are required to correct the problem. When you address a financial hardship early, debt consolidation could provide the debt relief you need before missed payments occur.
Before borrowing more money to address your debt problem, consider the savings you can achieve to determine if this is the best route. Below are the primary ways to save money with a debt consolidation loan.
Consider the cost of borrowing: The savings you can achieve with a personal debt consolidation loan is directly related to the cost of borrowing. Lenders typically charge a percentage of the loan in the form of an origination fee, along with closing costs, and other expenses associated with the loan. You can usually finance these costs to ease the pain, but lender charges reduce the amount you receive to pay off debt.
What is the interest rate on the new loan? In addition to loan fees, evaluate the interest rate offered. Ideally, the rate will be less than current credit card rates. The loan interest rate affects the amount you can save. When paying off multiple bills at different interest rates, receiving a percentage that is higher than some accounts but lower than others could still reduce the overall rate.
Loans also have fixed rates, rather than variable charges, which increase when the Federal Reserve raises rates. A locked-in rate can add additional savings if interest rates go up during the life of the loan.
Lenders decide the amount you can borrow, the interest offered, and the length of the loan based on your financial health. The lower your debt-to-income and higher your credit score, the better terms you will receive. Better credit quality also impacts the fees charged.
How Long Will You Have to Repay The Debt? In many cases, even with upfront fees and a less than ideal interest rate, you can save money due to the shorter loan term. Reducing the time it takes to pay off the loan can save thousands of dollars in interest, even if you cannot qualify for a lower rate. Most personal debt consolidation loans range from one to seven years.
Credit card companies charge double-digit interest rates and entice you with low minimum payments that can take decades to repay. When you pay 20% or more on revolving debt,and only a tiny amount goes toward the principal, it can take 30 years or more to pay off the account, even if you never charge another purchase.
Final Thoughts
Any debt repayment strategy that expedites payoff will save you money by reducing the amount of interest you pay. If you are able to qualify for a lower interest rate, you could save even more.
