Simplify Your Finances: 4 Strategies to Consolidate Debt and Regain Control
7/17/2023
If you’re like most Americans, you have some combination of debt, such as car loans, credit cards, medical debt, student loans, and others—each with different interest rates, due dates, and finance charges. Our lives are hectic enough, so why not make paying your bills easier and save money along the way?
It’s easy. Just combine your multiple debts from credit cards, high-interest loans, and other bills into a single loan with one monthly payment that fits your budget. Doing so could help you save money with a lower interest rate or gain the advantage of a longer repayment window to better manage your budget.
Depending on your situation, you could do this with a fixed-rate Personal Loan or Home Equity Loan, take advantage of a cash-out refinance on your home or auto, or even transfer your high-interest credit card balances to a lower-rate credit card, and save hundreds or even thousands on interest.
You might ask yourself, “Why would I want to exchange already established debt for another loan debt? Isn’t that just trading one payment for another payment? It’s still money going out each month, so why does it matter?”
All great questions. So, let’s look at the top four reasons it might be a good move.
1. Simplify Payments
By paying off multiple debt accounts with one loan, you can enjoy one single monthly payment, instead of several. Plus, unlike revolving debts, such as with credit cards, the interest rate on a Personal Loan, Home Equity Loan, mortgage refinance loan, or auto refinance loan is usually fixed and will never change, meaning your payment will always be the same—no surprises. You’ll also know exactly when you’ll pay it off. Hello, light at the end of the tunnel!
2. Save Money
A new loan or credit card could have a lower interest rate than your already established debts, which means you’ll save money in interest overall. Plus, the monthly payments could even be lower, depending on the rate and term (time you’ve agreed to pay the loan back).
3. Pay off Debt Faster
When you put less money towards interest, you may be able to shorten your repayment term and pay down the principal balance faster.
4. Improve Credit Score
Your loans and debts are all recorded in your credit report, which is where your credit score comes from. Paying off your debts with a different loan will mark these as paid on your credit report, which could improve your score by showing that you’re a responsible borrower who can meet monthly repayments on time. With on-time payments made consistently with your new loan, your credit score can improve.
For the savings alone, consolidating your debt can really make cents (see what we did there?). Here’s an apples-to-apples example of how much you could save each month just by taking out a Personal Loan. Imagine how much you could save if you took out a home equity loan since the rate on those is normally a bit less than a Personal Loan.
| Balance | Interest Rate | Monthly Payment | 5-year interest paid | |
|---|---|---|---|---|
| High-Interest Credit Card | $15,000 | 21% | $406 (min. payment) | $9,338 |
| Personal Loan | $15,000 | 10% | $320 (fixed payment) | $4,099 |
| Estimated Personal Loan Savings | $5,239 |
Using the example above, you could save $5,239 by taking out a personal loan to pay off just one high-interest card. That’s $86 more dollars in your pocket a month ($406 – $320) or $1,032 a year!
Sum It Up
Consolidating your debts by paying them off with a more favorable loan or credit card could be a great option. Not only will you simplify your payments, but you could save a lot of money.
