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:
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.
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.
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:
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.
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.(source: https://www.thebalance.com/how-to-understand-your-credit-card-billing-statement-960246)
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.
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:
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:
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.
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.
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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Qualified clients using RocketLoans will see loan options for a 36 or 60 month term, and APR ranges from a minimum of 5.983% to a maximum of 28.99% depending upon their credit profile. An origination fee of 1% - 6% is charged for each loan. This fee is deducted from the balance before funds are disbursed to the client. For example, a 3 year $10,000 loan with an 8% interest rate and a 4% ($400) origination fee would have 36 scheduled monthly payments of $313.36 for an APR of 10.796%. Borrower must be a U.S. citizen or permanent U.S. resident alien at least 18 years of age (in Nebraska and Alabama a borrower must be at least 19 years of age). All loan applications are subject to credit review and approval and offered loan terms depend upon credit score, requested amount, requested loan term, credit usage, credit history and other factors. Not all borrowers receive the lowest interest rate. To qualify for the lowest rate, you must have excellent credit and meet certain conditions. Rates and Terms are subject to change at any time without notice.
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