Combining debt onto a consolidation loan should seriously be explored by those whose credit card balances are ruining them financially. Referring to the situation as “ruination” is not hyperbole. $10,000 in credit card debt could end up costing far more than expected when the interest on the debt is massively high.
The High-Interest Hassle
Borrowing money in excessive amounts is what leads people to getting into serious financial problems. Putting the debt onto high-interest credit cards makes the problem of debt even worse. Paying off the debt becomes incredibly difficult when making more than the minimum payment. Credit card statements come with explanations of how long and how costly paying only the minimum payment will be.
$5,000 in debt on one card may take many years to pay off. $5,000 in debt on a credit card with a 22.2% interest rate with a minimum monthly payment of $200 would take 153 months — more than 12 years — to wipe out. The final cost would be $9,112.59. Paying two cards with the same debt and similar interest rate means $400 per month in minimum payments and more than $8,200 in interest alone. Someone with very little discretionary income is going to have a very hard time coming up with $400 per month. When financially strained, some may chose to use one credit card to pay the other some months. The balances don’t move as a result. This further extends the payoff date and drives up the costs.
Moving the debt to a low-interest debt consolidation loan makes much better fiscal sense.
Taking Out a Debt Consolidation Loan
Being approved for a debt consolidation loan definitely places a borrower on the path to getting his or her finances in order. A $10,000 loan at an interest rate of 9.1% at $300 per month ends up costing $13,292.30. A little under $3,300 in interest is far better than $8,200 in interest.
Reducing the minimum monthly payment down to $300 opens up $1,200 in additional discretionary income per year. A budget won’t be as strained with the additional cash flow.
Additional Benefits to a Debt Consolidation Loan
Saving money on interest is one of many benefits to taking out a consolidation loan. Those having trouble paying their current debts may be dealing with calls and letters from collection agencies. Moving the debt to a new loan — an easier to pay one — could put an end to such stressful harassment.
Managing the repayment of debt becomes easier since there is only one lender to deal with. Four different credit card accounts requires staying on top of four different due payment due dates and other responsibilities. Financial management becomes less complicated with a consolidation loan.
Secured vs. Unsecured Debt
There are two different types of debt consolidation loans a borrower can seek. A secured loan is one backed by collateral. An unsecured loan requires no collateral. Applying for an unsecured loan may be difficult when dealing with massive credit card debt since the debt drives down a credit rating. The interest rate on an unsecured loan is going to be higher. Unsecured personal loans also come with lower threshold amounts. $10,000 may be the cutoff.
A secured loan comes with lower interest, easier approval terms, and access to more funds. The obvious drawback here is failure to pay the loan puts collateral at risk for seizure.
The Discipline Factor
Without a clear and committed desire to pay off a debt consolidation loan and cut down on borrowing and spending, financial troubles will never go away. A debt consolidation loan positively must be the first step into a completely new and more fiscally-tempered direction.