5 Benefits of Debt Consolidation
When you’re in debt, opening yet another line of credit might sound like the worst idea possible.
But there’s actually one smart financial strategy that suggests you do just that. It’s called debt consolidation, and it involves rolling your existing lines of credit into a new one. And if you do it right, it might save you a boatload of cash.
5 perks of consolidating your debt
Debt consolidation is a debt management strategy in which you move your existing debts over to a new form of financing. For instance, you might open a new credit card and transfer your old cards’ balances onto it, or take out a personal loan to repay other types of revolving credit. That way, instead of chipping away at multiple debts, you only have one to worry about.
Obviously, this approach can radically simplify your finances. But depending on the terms of your new loan agreement, it can actually save you money, too. You might score a lower interest rate or longer repayment period, which could mean less cash out of pocket for you in the long run.
There are certainly pros and cons to consider before deciding if debt consolidation is right for you, as it isn’t the right strategy for everybody. (For instance, if your credit isn’t where you want it to be quite yet, you may not qualify for another loan.)
But there are some benefits of debt consolidation that are hard to ignore if you’re dealing with a towering pile of repayments. Here are five worth knowing about.
1. You can lengthen your repayment period — and lower your monthly payments
Sometimes, the problem isn’t the total amount you owe — it’s how soon you owe it. If you need more time to make ends meet, opening a new loan with a longer repayment period could help you reduce your financial stress in the short term, especially since longer-term loans generally carry lower monthly payments.
2. You can lower your interest rate or shorten your repayment period to pay a lower total overall
Maybe coming up with the cash is no problem in the short term, but that staggering debt total is making you cringe. While there’s nothing that can be done about the principal of the debt, if you find a new loan that can cover your existing debts at a lower interest rate, you might stand to save hundreds of dollars over time.
For example, let’s say you have two open lines of credit: an auto loan with a balance of $8,000 and an interest rate of 7% APR, and a credit card with a $2,000 revolving balance at 20% APR.
If you took four years to pay off both of those debts as-is, you’d end up paying $2,240 in interest on the car and $1,600 in interest on the credit card, for a total of $3,840 — on top of the $10,000 you already owe.
But if you took out a personal loan for $10,000 at an APR of 4%, paid off both those debts in full, and then repaid the personal over those same four years, you’d only spend $1,600 total in interest, saving you more than $2,000. That’s a big chunk of change!
3. You might even be able to ditch interest entirely, at least for a while
Some banks and credit card companies offer a promotional 0% interest period for a set amount of time after you open the line of credit. If you opened such an account and transferred your debts onto it, you might be able to avoid paying interest entirely — so long as you paid it off in full before the promotional period ended and the regular interest rate kicked in.
4. Consolidating your debts allows you to work with a preferred lender
If you have a preference for a certain financial firm or lending company, consolidating your debt gives you the power to work exclusively with that provider. Whether it’s its solid customer service or commitment to social values, you’ll be able to support an enterprise you actually like — which always makes paying bills at least a little bit less painful.
5. Consolidating your debts can simplify your life
When all is said and done, one of the most appealing aspects of debt consolidation has more to do with saving you time than money. Keeping track of multiple loans can be a serious headache — and debt consolidation can allow you to skip that extra dose of Advil.
Paying down a single loan can feel a lot less taxing than paying off two or three, even if the amount you spend is the same. You’ll also run less risk of accidentally missing a payment, which can be an easy mistake to make when you’re dealing with a whole pile of bills.
If you’re considering opening a personal loan to repay your existing debts, here’s what you need to know before you submit your application.