Debt Consolidation Benefits

credit card

Debt consolidation is the process of combining multiple bills or credit cards into a single fixed monthly payment. The idea of consolidating debt may be daunting if you're new to the idea, but the process is rather simple and has the potential to save you money in total interest over the lifetime of your repayment.

There are a variety of reasons people consolidate their debt. Here are a few of the benefits of debt consolidation:

  • Receive a lower rate through a personal loan
  • Move debt from a variable to a fixed rate
  • Move debt to one loan for the convenience of making a single payment each month
  • Move debt to a personal loan to change the way interest accrues

The idea of taking on another loan when you already have debt can be overwhelming to many, but we'll walk you through a few examples that will help you understand the benefits of consolidating debt with a personal loan and help you decide if it's the right financial move for you.


Debt Consolidation Example

Let's say you have a balance of $15,000 on your credit card with an interest rate and APR of 17.99% (which is roughly the average of most consumer cards). If you keep the balance on your card while paying the minimum monthly payment of 3%, it will take you 299 months to pay off and the total amount you'll pay in interest will be $14,782.48.

If you were to consolidate the $15,000 with a personal loan that has an interest rate of 13.06% (which is the average interest rate for a unsecured personal loan from RocketLoans) and an APR of 16.03% (the APR is inclusive of a 4.5% origination fee), your debt could be paid off in 36 months and you will only pay a total of $3,885.34 in interest and fees.

In this scenario, you would save $10,897.14 in interest throughout the lifetime of paying back your debt with a personal loan vs. a credit card.


Fixed vs. Variable Rates

Personal loans have a fixed rate and fixed monthly payment, which makes it easy to budget your finances without having any surprises on what you'll owe each month. Most credit cards have variable rates, so the rates you'll pay can change monthly, quarterly, or annually based on interest rate changes in the market. By moving debt from a variable rate credit card to a fixed rate personal loan, you may be able to save money in the long run.

Here are a few other differences between the rates you'll want to consider when deciding if debt consolidation is right for you:

Fixed Rates

  • The monthly payment will not change
  • If interest rates in the market rise, your fixed rate will not
Variable Rates
  • Interest rates can change at any time based on market factors
  • The monthly payment can change from month to month
  • May be initially lower than a fixed rate, but can rise and you may end up with a higher rate

Choosing the type of rate you want for your debt can be difficult. Variable rates on another loan or credit card may be lower and more attractive when you're initially taking one out, but they are also riskier because they can rise at any time. You should look at current trends to see if there might be a spike in interest rates soon to decide which type of rate you're more comfortable with.


Repayment Periods

Personal Loans

Personal Loans have a fixed interest and fixed monthly payment, so you'll be able to circle the date your debt will be paid off from the time you sign your loan. Repayment periods for this type of loan normally range from 3 to 5 years, and you'll make the same monthly payment until your loan is paid off. Fixed payments help you easily budget all of your finances for the month and can help you get on the right track to pay off your debt quicker.

Credit Cards

Credit cards, on the other hand, typically come with a variable rate. This means that the interest you're paying on a revolving balance can change from month to month, as will your payments. The required minimum payment on a credit card is 1-3% of your balance, and paying at this rate can take hundreds of months to pay off and may end up costing you thousands of extra dollars in interest and fees through the life of your loan. If you'd like to see how long your current debt will take to pay off, you can check your statement and will see a disclosure similar to the image below that will tell you how long it will take you to pay off your debt if you make only the minimum payment each month.

credit cards balance statement (source: https://www.thebalance.com/how-to-understand-your-credit-card-billing-statement-960246)

How Credit Card Interest Works

Unlike a personal loan where the interest accrues monthly, credit card interest is calculated based on the average daily balance. The interest you're charged on a credit card is calculated by dividing your APR by 365 and multiplying it by your principle balance. Lets say you have an APR of 17.99% on your credit card with a revolving balance of $3,000 and are on a 30-day billing cycle. On the first day, an interest rate of .049% will be assessed to your account. On the next day, the interest you pay will not only be based on your principle balance, but also on the interest charged from the previous day, as well - and this calculation will continue for the entire billing cycle.


The Process of Consolidating Credit Cards With a Personal Loan

With technology constantly advancing, new avenues have emerged to make consolidating debt safe, simple and convenient. Consolidation can be used in combination with your favorite financial budgeting tool to help you set achievable goals for when your debt will be paid off for good. Instead of paying the minimum balance each month on your high-interest credit card, consolidating it with a personal loan helps you set a long-term plan to get out of debt.

Here's how to do it:

  1. Check to see the balances and rates on your credit cards.
    You can consolidate some or all of the debt you have, including cards you may have from clothing or furniture stores.
  2. Check your debt consolidation options for free.
    You can typically see your options in less than two minutes after filling out a quick form – and checking your rates won't do any damage to your credit score.
  3. Compare rates and decide how much you want to consolidate.
    After seeing the options you qualify for, compare the interest you're currently paying to your personal loan debt consolidation offers and decide which cards you want to consolidate. You don't have to consolidate all of your cards for the convenience of a single payment; however, if all of your cards have a higher rate than your offers, you can save by consolidating them all.
  4. When choosing your amount, remember to check the origination fee on your loan.
    Origination fees are deducted from your loan before they are deposited in your bank account, so keep this in mind when selecting an option in case you need to borrow a little more to cover everything.
  5. Select your debt consolidation option.
    Budget out your finances and decide which monthly payment fits best with your repayment and financial goals.
  6. Finish application and receive money.
    Finish the last few steps of your application and receive your money within 1-3 days.
  7. Pay off your debt.
    Use the money deposited in your bank account to pay the debt off the cards you want to consolidate.
  8. Be financially secure.
    Consolidating debt, and creating a plan to pay off high-interest credit cards is a smart move, but it also requires discipline. You also have to be in the mindset of not going out and charging up the same cards you have just paid off. Personal loans can be a great tool to get you out of trouble, but being disciplined and only using credit when you absolutely need it is important to understand as well.

How To Qualify For a Debt Consolidation Personal

Each lender looks at a wide range of financial factors when determining if someone qualifies for a personal loan as well as how much they qualify for, and each factor varies from lender to lender. Since personal loans are unsecured, lenders need to make sure they are following safe lending practices. Here are a few things most lenders take into consideration when qualifying you for a personal loan:

  1. Your credit score
  2. Your debt to income ratio
  3. Your monthly income
  4. The number of credit inquiries you've recently made
  5. Your history of making payments on time
  6. Your employment status

Lenders typically do not use the same calculations to qualify a person for a personal loan, so you'll likely receive different offers from lender to lender. If you receive similar offers from multiple lenders, you may want to take other factors into consideration before choosing which company to go with, like reviews of the company from other borrowers, how soon you need your money and how fast their application process is, and if they charge prepayment penalties, among other factors.


Should You Consolidate Your Debt?

Debt Consolidation is a simple way to manage your finances, save on interest and pay off your debt. It should be used as a strategy to help get you out of debt, and not used to make room on your cards to take on even more.

If you're disciplined to change your financial lifestyle, debt consolidation can be a great tool to use as a part of your budgeting plan.

You may also increase your credit score by moving your debt from your credit card to a personal loan, because credit cards are categorized as revolving debt while a personal loan is installment debt. A high amount of revolving debt (which is usually more than 30% of your available credit) will hurt your score, and installment loans don't have as much of an impact on this part of your score.

If you're not disciplined to change your financial lifestyle, debt consolidation may not be the right solution for you.

Debt Consolidation may not be right for you if you aren't dedicated to using it as a strategy to get out of debt. If your intention isn't to improve your old spending habits and work toward becoming financially responsible, debt consolidation likely isn't the right avenue for you at this time. Alternatively, you may want to seek help from a financial planner or take a financial planning course online to help you learn safe spending and financial practices before you consolidate your debt.


Consolidate and save

If you've already calculated your finances and know that debt consolidation is the right step for you to take next, head over to our application to see if you pre-qualify and check out your debt consolidation options.




Last Updated: April 17, 2017

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