Debt consolidation can ease stress and save you money – if you do it right.
Paying off multiple debts can be stressful. You may find yourself thinking about it all the time, counting the days until the next bill, and wondering how long it will be before you’re back in the dark.
But there is an effective way to alleviate that stress and simplify your payment schedule: bring all of your debts under one roof. Otherwise known as debt consolidation.
Although it is not a panacea, debt consolidation has some major advantages. We will take a look.
It can save you money
Let’s say you have $ 20,000 in credit card debt, spread across multiple cards. According to the Australian Bureau of Statistics, the average credit card interest rate is 19.94% per year. This means that if you paid off your credit card over 5 years, you would have spent $ 11,759 more on interest alone. That’s before you even look at the annual fees.
But there are a few options that could save you money. You can either take out a personal loan to pay off your debt or transfer the debt to a balance transfer credit card.
Letâs look at personal loans first. Personal loans generally have lower interest rates than credit cards and are more suitable for larger debts that will be repaid over a longer period.
For example, digital lender NOW Finance offers unsecured loans with an interest rate starting at 5.95% pa *. for borrowers with excellent credit.
If you qualified for this interest rate and paid the $ 20,000 over 5 years, you would only pay $ 3,171 in interest. In addition, NOW Finance does not charge any fees either. That’s a potential savings of over $ 9,000.
On the other hand, you could transfer your debts to a credit card with 0% interest on balance transfers for a set period of time. If you were able to pay off your debts during the introductory period, you would not pay any interest.
The longest introductory periods on the market right now are 36 months, so if you paid off three-fifths of your $ 20,000 debt during that time, you would still have $ 8,000 to pay. Over two years at an interest rate of 19.94% per annum, it will still cost $ 4,415 in interest alone.
However, some credit cards with balance transfer charge an annual fee that you should be careful about and some only allow you to transfer credit card debt. Other cards also allow you to transfer personal loan balances, but if you have other forms of debt, such as unpaid medical bills, unpaid utility bills, or a buy-it-now balance, you won’t be able to not cover it.
You can erase your debts faster
If you consolidate all of your debt into one account with a lower interest rate, but keep paying the same monthly payments, you can pay off your debt sooner.
Let’s say you have a $ 10,000 car loan with an interest rate of 7% per annum and you pay $ 400 per month to pay off the debt. You also have $ 5,000 in credit card debt with an interest rate of 19.94% per annum. And you pay $ 200 a month to pay off that debt.
All in all, that means you are paying $ 15,000 in debt with an average interest rate of 13.47% per annum and paying a total of $ 600 per month. (Again, this doesn’t factor in fees, but we’ll use this as an assumption.) To clear both debts, it would take 29.51 months.
However, if you took out a personal loan with a lower interest rate, you may be able to pay it off sooner. Let’s take the NOW Finance personal loan again as an example, assuming you are eligible for the 5.95% pa (compare 5.95% pa *) interest rate for borrowers with excellent credit. Again, there is no cost involved.
If you moved your debt by $ 15,000, but continued to pay $ 600 per month, you could pay off your debts almost 3 months earlier than in the situation described above. This means that you also saved almost $ 1,800.
It could reduce your monthly repayments
On the flip side, if you’re struggling to pay off your monthly payments, consolidating your debt can give you an opportunity to cut spending while paying off your debt.
Let’s stay with the example above. $ 600 is a lot of money every month. If you transferred your $ 15,000 debt to a personal loan, you could apply for a loan with a longer repayment period.
Suppose you took out the same personal loan with an interest rate of 5.95% per annum, but extended the loan term to 5 years. Suddenly your monthly repayments are only $ 289.
Be aware, however, that if you extend the term of your loan, you will pay more interest. Over 5 years, you would pay $ 2,378 in interest while you would pay $ 947 in interest over 2 years.
it can be less stressful
I don’t know about you, but having only one bill to think about each month is a lot less stressful than having 3, 4 or 5.
Instead of feeling this moment of dread several times a month, you will master it. You got this.
It can improve your credit
Although unsecured, debt consolidation can make it easier to manage your finances and reduce the risk of missing a payment.
Let’s say you’re having a rough month, your car needs urgent repairs, you’ve paid for medical bills, and maybe you’ve generally overspended. If you can’t meet your repayments, you should contact all of the different lenders, request an extension, possibly incur late fees, and possibly have them recorded on your credit score.
However, if you only have one lender to work with, suddenly things are much easier. You only ask for one extension, and you don’t suddenly have multiple debts piling up over the next month.
In turn, this can improve your credit score. You are less likely to miss a payment, which means there is less chance that your credit score will be affected. With a healthier credit score, you might even qualify for a lower interest rate if you ever need to refinance or take out a loan again in the future.
Learn more about debt consolidation loans from NOW Finance
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