When you’re juggling a lot of debt, especially credit card debt, it can be hard to figure out how to pay it all down and improve your financial health. A Debt Consolidation Loan might be the solution to relieve the overall burden and stress of your debt.
What is Debt Consolidation?
Debt consolidation means combining multiple debts into one loan. Instead of paying many different bills each month, you pay just one. This loan usually comes with a lower interest rate, helping you save money.
Why Consider Debt Consolidation?
Here’s what the data says about people facing debt problems:
| Average Amount per U.S. Household | Amount |
|---|---|
| Credit Cards | $8,437 |
| Personal Loans | $13,021 |
| Auto Loans | $22,612 |
| Student Loans | $32,051 |
Managing multiple debts can be stressful, especially when each one has a different interest rate and due date. Debt consolidation makes it easier to keep track of payments and could save you money over time.
1: Lower Your Interest Rate with Loan Consolidation
The goal with consolidation is to trade the high interest rate you’re currently paying for a lower rate with the new loan. Rates vary depending on your credit score, the loan amount and term length, but a consolidation loan is likely to get you a lower rate than you pay on your credit card.
As such, Debt Consolidation Loans are often a great option for high-interest credit card debt – you’ll save on interest over the life of the loan, and your rate will stay the same the entire time! Be sure to comparison shop to make sure you’re getting the lowest rate possible.
These tables illustrate the potential annual savings from consolidating debt by comparing the current interest costs on a $20,000 balance with a lower consolidation rate of 10%. The first table shows the impact on credit card debt with a 27% rate, while the second table highlights the savings for a personal loan with an 18% rate.
Credit Card Debt at 27%:
| Debt Type | Original Rate | Annual Interest Cost | Consolidation Rate | Annual Interest Cost at 10% | Annual Savings |
|---|---|---|---|---|---|
| Credit Card | 27% | $20,000 × 27% = $5,400 | 10% | $20,000 × 10% = $2,000 | $5,400 - $2,000 = $3,400 |
Personal Loan at 18%:
| Debt Type | Original Rate | Annual Interest Cost | Consolidation Rate | Annual Interest Cost at 10% | Annual Savings |
|---|---|---|---|---|---|
| Personal Loan | 18% | $20,000 × 18% = $3,600 | 10% | $20,000 × 10% = $2,000 | $3,600 - $2,000 = $1,600 |
2: Simplify Your Bill Payments – One Easy Monthly Payment
There’s peace of mind knowing only one bill will be due each month. You won’t have to manage multiple due dates, and you won’t have to worry about which debts to prioritize. Plus, you’ll be paying the same amount each month, making it a lot easier to budget for your bill!
When you combine debts, you typically get a lower monthly payment.
Example:
| Type | Balance | Interest Rate | Monthly Payment |
|---|---|---|---|
| Credit Card A | $4,000 | 18% | $100 |
| Credit Card B | $3,500 | 20% | $90 |
| Personal Loan | $2,500 | 15% | $60 |
| Total | $10,000 | $250 |
After consolidation into a single loan:
| Consolidated Loan | Balance | Interest Rate | Monthly Payment |
|---|---|---|---|
| New Loan | $10,000 | 10% | $180 |
By consolidating your loans and reducing high-interest payments, you can simplify your finances and save more each month. Monthly Savings = $70
Debt Pulling You in Too Many Directions?
Celebrate your financial wins and know that you have a community that supports your goals! With a PrimeWay Debt Consolidation Loan, you get
Low Rates & Flexible Terms
Intro Rate at 8.99% APR* for 6 Months, then as low as 10.50% APR for up to 24 Months
Benefit of Credit Union Membership
Friendly, helpful customer service and a convenient online application.
3: Create a Clear Path to Pay Off Debt Faster
You’ll have a fixed interest rate for a set amount of time with a certain amount due each month, which allows you to easily see your progress. When you take out a Debt Consolidation Loan, you’ll be able to choose a term that fits your current needs, allowing you greater control over your debt.
Plus, at PrimeWay, there are no prepayment penalties. This means it is entirely possible to pay off your new debt consolidation loan early! Additional payments can lower your interest costs in the long run, helping you become debt-free even sooner.
Lower interest and structured payments help you become debt-free faster.
Time to Pay off Debt (Example):
| Method | Total Debt | Interest | Years to Pay Off |
|---|---|---|---|
| Separate Payments | $10,000 | High (15-20%) | 5-7 years |
| Consolidation | $10,000 | Lower (7-12%) | 3-4 years |
4: Improve Your Credit Score with Smarter Debt Management
Opening a Debt Consolidation Loan may lower your score initially, due to the credit inquiry. However, the benefits can easily outweigh the initial impact to your score – if the new loan helps you make regular, on-time repayments, your score will improve over time.
First, when you use a loan to pay off high-interest credit card debt, it lowers the amount of credit you're using compared to your total credit limit. This is called the credit utilization ratio, and it makes up 30% of your credit score. A lower ratio shows you’re managing credit well, which can help raise your score.
Second, making regular on-time payments on your consolidation loan builds a positive payment history. This is the most important part of your credit score (35% of your score). Paying on time every month can boost your credit over time.
Finally, having a mix of different types of credit, like a loan in addition to credit cards, can also help improve your score a little.
Tips for Successful Debt Consolidation
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Always check the interest rate and any fees before signing up.
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Make sure the monthly payment fits within your budget.
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Work with well-known banks or lenders and avoid companies that promise fast, unrealistic solutions.
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Stick to a budget so you don’t build up new debt.
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If you need help, consider talking to a credit counselor.
Is Debt Consolidation Right for You?
If you’re struggling to keep up with multiple debts, debt consolidation might help. It can make payments easier, reduce stress, and even save money in the long run. But before deciding, take a close look at the interest rates, fees, and your overall financial situation.
Taking charge of your finances is an important step. Explore your options, pick what works best for you, and stay committed. With the right plan, debt consolidation can help you move toward a more stable and stress-free future.
Real-Life Stories of People Who Used Debt Consolidation
Raymond – Assistant Principal
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His situation: After his divorce, Raymond had several debts to manage.
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What he did: He took out a debt consolidation loan.
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The result: With one easy monthly payment, he reduced stress and improved his credit score by making on-time payments.
Julie – Credit Card Debt from Shopping
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Her situation: She racked up $11,000 in credit card debt from overspending.
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What she did: She joined a debt management program.
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The result: She got her debt under control and worked towards financial freedom.
Angela – Overcoming $35,000 in Debt
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Her situation: She faced a large amount of debt after a divorce and medical expenses.
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What she did: She consolidated her debts and followed a strict repayment plan.
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The result: She became debt-free and regained financial stability.
Frequently Asked Questions (FAQs)
What Types of Debt Can Be Consolidated?
Most common types of unsecured debts, like credit card debt, medical bills, personal loans, and payday loans, can be consolidated. Secured debts, like mortgages or auto loans, usually aren't included.
Can Debt Consolidation Hurt My Credit?
Initially, consolidating debt might slightly lower your credit score because it involves opening a new account or loan. However, consistently making your new payments on time will improve your credit score over time.
How Long Does It Take to Pay Off Consolidated Debt?
The timeline varies based on the total amount you owe and the terms of your consolidation loan. Typically, it takes between two to five years, depending on how much you pay monthly.
Struggling with debt? Learn 4 effective debt consolidation strategies that can simplify your payments, reduce interest rates and help you become debt-free faster.