Debt consolidation offers you the ability to secure a single loan to pay off all your smaller loans and debts.
This means you will have just one monthly payment rather than several, with the idea that one payment will be easier to manage. The goal is to lower the interest rate and monthly payment while paying off your debt quicker.
The most common reason people consider debt consolidation is to save money while working on reducing their debt. Switching your debt to a lower interest rate helps you save on interest payments. For the same monthly payment, paying down debt at a lower interest rate means a greater amount of the payment is going toward the principal amount owed. The total interest paid can be significantly less for a loan with a lower interest rate. The amount of time needed to pay off the debt can also be shortened, as long as more debt isn’t constantly added.
For example, imagine you had $10,000 in credit card debt at an interest rate of 16%. If you consolidated your debt at a lower interest rate, you could save a significant amount of money and pay off your balance in a shorter amount of time.
See the table below to better understand how.
Type of debt
Debt consolidation loan
Length of repayment
Before applying for any consolidation services, make a broader plan to repay your consolidation loan by following these three steps.
Trace Your Financial Footsteps — Look over your statements to see where you overspend. You might find out you’re spending far too much on dining out, or maybe you pay for coffee runs far too often. Identifying where your money is going, can help you make the right adjustments.
Budget, Budget, Budget — Come up with a realistic budget and stick to it is the most challenging step after taking a hard look at your financial footsteps. It’s all about establishing limits and avoiding carrying credit card balances from month to month.
Stay Motivated — Repaying your debt can take months, or even years. It can be easy to get discouraged. Hold yourself accountable and stay tuned in to your goals by continually reviewing your financial statements. This will keep your progress and your financial ambitions top of mind.
The Debt Stops Here
Using a debt consolidation loan to pay off your expensive debts can be a smart way to save money. Before you pick one, understand how debt consolidation works and the potential benefits and drawbacks of each available option. For all your debt consolidation questions, see us at Kansas City Credit Union today!
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