How a Debt Consolidation may be the best option to get out of debt

Is Debt Consolidation the right loan for you? 

You’ll probably be shocked to hear that the best recommendation for paying off debt is by taking on another type of debt when really, this will help you in the long run. Debt consolidation loans are becoming increasingly popular. Since typically the interest rate is lower when compared to interest on a credit card.

What is a debt consolidation loan?

A debt consolidation loan is a way for you to combine your debts into one single payment, typically with a much lower interest rate over a short period. While a debt consolidation loan doesn’t erase your debt, it can help make it more manageable.

Now, is a debt consolidation right for you?

The first step in analyzing if this is the loan for you is to evaluate your current balance and interest on your existing credit cards and loan payments. This is the most crucial part of analyzing if a debt consolidation loan would benefit you; by going online, you can use various loan calculators and calculate your current interest rate and balance over the repayment period and then repeat this step with the debt consolidation information. Whichever amount gets you to a lower interest and total repayment at the end will likely be the best option for your finances.

The second step is seeing if there are any fees associated with consolidating debt, while this isn’t very common it can happen and you don’t want to add more to your debt than you need to. Make sure to ask your lender before starting the loan process if there are any fees associated with a debt consolidation loan.

Below are two graphs; the first one represents the amount of interest vs. principal you’d pay on the 25% APR credit card with a $10,000 balance over 60 months, and the second graph represents the interest vs. principal you’d pay on the 8% debt consolidation loan with a $10,000 balance over 60 months.

As you can see, the total interest paid is much less on the 8% APR debt consolidation loan versus the 25% APR credit card. Utilizing a debt consolidation loan with no origination fees, you will be paying $2,165 in interest for a total repayment cost of $12,165, compared to $7,610 in interest and a total repayment cost of $17,610 if you continue to pay on your credit card. The credit card interest alone would almost double what you owe. This is also taking into account that you no longer use your credit card while you are paying it off. If you do continue to use it, it will take longer to pay off and what you pay in interest will be much higher.

When looking for a debt consolidation loan consider interest rate with any rate discounts, origination fees, and penalties. Don’t wait for rates to keep going up. Get a hold of your finances and consolidate you high interest debt today! Apply for a Debt Consolidation Loan from FCCU by clicking here.