Between car loans, student loans, and credit cards, it is hard to keep up with the balances and payments of your outstanding debts. In the end, when people are unable to handle thousands of dollars worth of debt, they are forced to look at other options instead of trying to make a dent in the ever-growing mountain. And one of these options is debt consolidation.
Consolidation of the debts into one loan might help in streamlining your finances. In fact, this strategy is also likely to help you deal with any underlying financial difficulties. All in all, you can save your money and pay off your debts in one go.
Read more to know how debt consolidation can help you save money.
What Exactly is Debt Consolidation?
As the name suggests, debt consolidation is the procedure of combining multiple debts into one larger debt. Consumers who are reeling under a huge amount of high-interest loans usually take this step.
Consumers often use this technique for combining medical debt, student loans, auto loans, credit card loans, and other kinds of loans in a new loan. So, the borrower simply has to pay one payment every month rather than separately paying for every debt.
Along with simplifying the finances for you, consolidating your debt ideally gets the borrower highly favorable terms of the loan, such as competitive interest rates.
Five Ways to Save Money Through Debt Consolidation
Debt consolidation can help you save money in more ways than one. Here’s outlining five such ways for you:
1. The Ability to Repay Your Debt Faster
Going for debt consolidation loans can help you be on the fast track to complete payoff – more so when you have a major credit card debt. Also, credit cards do not come with a fixed timeline to pay off the balance. However, loan consolidation can fix monthly payments to ensure a clear start and finish to your loan.
Repayment of the debt quicker means you will have to pay less as net interest. Additionally, the faster your debt gets paid off, the easier it is for you to put your money towards other goals, like retirement or emergency fund.
2. An Opportunity to Simplify Your Finances
If you are able to consolidate your debt, you will not need to worry about remembering multiple monthly due dates as you will have to make only one payment. Moreover, the payment remains the same every month. Thus, you know precisely the amount you need to set aside each month.
The combination of multiple debts in one loan lowers the number of interest rates and payments you need to think about. It will also enhance your credit score by eliminating the prospect of making late payments or completely missing payments.
As you can use the loan fund for paying off other debts, consolidating debts help in turning two to three payments into one payment. It can help to ease out budgeting and offer a few opportunities for missing payments.
3. A Chance to Get Low-Interest Rates
As of now, the average credit card rate stands around sixteen percent. In the meantime, the average rate of the personal loan remains lower than eleven percent. Definitely, rates differ based on the loan amount, term length, and credit score. However, you can get a lower rate of interest with debt consolidation loans than what you are presently paying using your credit cards.
So, consolidating debts for the consumers who already have good credit scores usually leads to a considerably lower rate of interest than average credit cards.
4. Get to Keep a Fixed Repayment Plan
If you utilize a personal loan for paying off the debt, you will know precisely the amount that is due every month and the timeframe for the last payment. If you pay just the minimum amount with a high-interest credit card, it can be quite a few years before you can pay off everything in full.
All in all, when you have a fixed repayment plan, your interest rate and payment remain unchanged throughout the period of your loan. Thus, there are no unforeseen fluctuations in the payment of your monthly debt.