Paying off debt tops most lists of New Year's resolutions. But many households are experiencing financial hardship and are not in a position to make extra payments. Hundreds of thousands are finding it difficult to even make ends meet, which can result in feelings of helplessness about their financial circumstances. If this sounds like you, there's good news! You have options.
It's possible to take control of your debt without spending more on monthly payments — with a loan consolidation or credit card balance transfer.
You first need to understand the difference between loan consolidation and a credit card balance transfer. And then, you can determine whether consolidating your debt will offer the financial relief you need to improve your situation.
What is debt consolidation?
Debt consolidation is a strategy for paying off at least two existing debts with one new loan. Consumers can use home loans, personal loans, and even credit cards to consolidate debt. With one loan or credit card payment to manage each month, instead of several, paying bills becomes less of a burden. It could also mean saying goodbye to collection calls. Debt consolidation does not eliminate your debts. It can, however, lower the cost of repayment.
How does loan consolidation work?
You typically start by applying for a new loan with better terms, lower interest rates, or both. This new loan is then used to pay off multiple higher interest rate loans. Once the old loans are paid, you are left with the responsibility for only a single monthly debt payment. Securing a lower interest rate loan means you can reduce the cost of borrowing by paying less interest over the life of the loan.
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How does a credit card balance transfer work?
Similar to a loan consolidation, a credit card balance transfer could allow you to use a lower interest rate credit card to pay off higher interest rate credit card debts. Many credit cards offer a 0% introductory interest rate, which can save you even more money on debt repayment. A credit card balance transfer isn't limited to paying off existing credit cards. Some credit card companies allow new borrowers to write paper or electronic checks to pay off other types of debts as well.
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Benefits of loan consolidations and credit card balance transfers
Loan consolidations and credit card balance transfers offer multiple benefits that can improve your financial situation. Here are a few to consider:
- You can pay off debt sooner. When you use a lower interest rate loan to pay off existing debt, you could be debt-free faster without changing your monthly debt payment. Unlike when you held higher interest rate debt, more of the monthly payment is applied to the principal amount, allowing you to potentially pay off debts in months instead of years.
- You can reduce stress with one monthly bill payment. Juggling multiple due dates and payments can add to your money worries. When you consolidate your debt, you only need to make one payment each month.
- You can save money. Depending on whether you consolidate using a credit card or loan with a lower interest rate or longer payment terms, you can save money in interest charges. A loan or card with a lower interest rate and shorter repayment period will save you the most money. Even a lower interest rate consolidation loan with longer repayment terms has the potential to keep more money in your bank account, depending on the rates and terms of your existing debt.
- You can stop collection calls. If a creditor has placed you in collections, paying them off or meeting satisfactory payment arrangements may be the only way to eliminate those stress-inducing phone calls.
As you consider the benefits of consolidation, make sure you understand the total payment costs. While lowering your monthly payment can provide immediate financial relief, extended repayment terms may mean more money paid in interest charges and a longer time in debt.
If you qualify for a lower interest rate loan or credit card, use it to pay off higher interest rate debt to improve your financial situation. Debt consolidation can help you get a handle on debt obligations. Remember that long-term financial improvements occur when you follow a financial plan that helps build an emergency savings fund, follows a realistic budget, and prevents you from using the credit your consolidation loan just freed up.