Debt consolidation is a hot topic this time of year, likely because of rising interest rates and increasing costs.  People are spending more than ever and then find themselves in a position where the monthly expenditure is more than they feel comfortable with.  It can happen to anyone and it can happen quickly.  So I decided to write this article in an effort to explain what debt consolidation is, and how it can help.

 

What Is Debt Consolidation?

Debt consolidation is when someone combines their personal debt such as credit cards or personal loans into a singular lower interest loan.  The result often saves them money by trading the multiple high interest rates for a single low interest rate and one loan.  The outcome usually is the person saves money on a monthly basis because they are able to eliminate the credit cards / personal loans, etc.

When Should You Consider a Debt Consolidation Loan?

This question is subjective to the individual.  But a debt consolidation loan may be a good idea when you meet any of the following criteria:

  1. Your monthly debts like credit cards are becoming too high to manage
  2. Your interest rates on things like credit cards and personal loans are very high
  3. You cannot find a way to manage the debt by paying it on your own
  4. If a reputable option comes along that would combine and lower the interest on your existing debt and the numbers make sense.

It’s always better to pay your existing debt as agreed and develop good spending habits, but sometimes these things happen and you have no choice but to put an emergency medical bill on the credit card, or take a personal loan out for a family member that is in need.

Things To Consider About a Debt Consolidation Loan

If you found yourself in a high debt situation and you decide to use a consolidation to lower your monthly payment, that is fine.  Remember the consolidation loan isn’t changing your spending habits, it’s rearranging them.  If you are able to consolidate this debt and free up some money, it may be advantageous to reconsider and budget your lifestyle differently.

How a Debt Consolidation Works

Let’s say you have following debt:

  • 1 Credit card at $7,500 and 22% interest.  Minimum payment is $80
  • Another credit card at $5,500 and 18% interest, Minimum payment is $80
  • A personal loan at $3,500 at 9% interest, Minimum payment is $73

Your total debt in this situation would be $16,500.  The first credit card ( if you are making the minimum payments) will charge you a total of $9,087.52 in interest.  The second credit card will charge you a total of $3,891.20 in interest.  The personal loan (assuming it’s a 5 year fixed) will charge you a total of $859.25. That’s a total of $13,837.97 in interest.  Not including principle balances (the amount you borrowed in the first place)

Now you want to consolidate that because your total monthly payment equal $233.  A consolidation loan at $13,837.97 for 5 years at 7% interest  would make a monthly payment of $274.00.  That’s $41 more than what you were paying before.

So this is where your ambitions come in, are you more concerned with paying the loan off faster?  Paying less per month?  Saving money on total interest?  If you chose the last answer, this loan may be a good option for you.

But if you are anticipating you need to save money per month you will have to find a different option.  That option could be the same loan stretched out over 7 years.  That would make the payment $209, which is $24 less.  The total interest you pay? $3,705.94.  So you are paying less per month, a smaller interest rate and less interest over the life of the loan.

 What More Do I Need To Know About Debt Consolidation?

There are many different options for a loan like this.  Secured, unsecured, mortgage refinance, collateral refinance.  They all have advantages and disadvantages  Depending on your asset situation you may be able to secure a  debt consolidation loan through your mortgage.  That would be the lowest interest rate, we have some very useful tools that can help you make an educated decision, feel free to use our debt consolidation tool.

If you find yourself with more questions we have a section of our website called ask a professional here.  It has access to a number of professionals ranging from financial advisers, accountants, realtors and more.  Some of our clients have found this particularly useful.

 

Finally if you want to talk with someone on the phone or in person you can contact me via the information below:

Thank you for reading and hope this has been helpful.

 

     www.mortgagegreenbaywi.com

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 Justin Scott

Loan Officer

NMLS 878581

  1. C) 920-530-4484
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Executive Mortgage

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909 . E Walnut Street

Green Bay WI 54301