Credit card debt is a drag. It takes up a lot of mental real estate, and keeps you from being able to focus on long-term financial goals. Because no matter what you want to do — buy a house, start a business — the credit card debt is in the way.
And it’s easy to feel alone, as if you single-handedly invented credit card debt. I mean, we know that’s not true. But sometimes shame flickers at the edges, which only makes us avoid the topic more.
Let’s set aside cruddy feelings and look at reality. GOBankingRates recently shared the following up-to-date statistics about Americans and their credit card debt:
“A recent GOBankingRates survey found that 30% of Americans have between $1,001 and $5,000 in credit card debt, 15% have $5,001 or more in credit card debt, and about 6% have more than $10,000 in credit card debt.”
In other words? You’re not alone. So let’s put the worry energy toward a solution state of mind. Today we’re taking a closer look at debt consolidation loans, how they work and when they are a good option for erasing credit card debt.
What is a Debt Consolidation Loan?
Simply put, a debt consolidation loan is a loan you take out to pay off all of your debts, i.e. consolidating many debts into one. In most cases, a borrower is able to “trade down” on their interest, lowering their rates and what they’ll pay in interest. (Especially since many credit cards have interest rates of 17% and higher!) This can result in significant savings — and also saves time, getting you out of debt faster. Paying down credit cards with minimum payments can take upwards of 30 years. (Which usually ends up meaning that everything you bought ended up costing you twice as much, because of the compounding interest year over year.)
To illustrate this, let us look at an example of how this might play out for a borrower:
MINIMUM PAYMENTS SCENARIO
- The borrower begins with a total of 5 credit cards to their name, carrying a total of $17,500 in debt.
- The borrower pays $350 in minimum payments across their cards, and their interest rate averages 19.99%.
TOTAL TIME: 105 months to pay off (that’s almost 9 years)
TOTAL COST IN INTEREST: $19,227
TOTAL COST OF PURCHASES PLUS INTEREST: $36,727
LOAN SCENARIO
- The borrower may borrow a debt consolidation loan for the $17,500 they owe and pay off all of their cards.
- That loan may feature a single payment date, a defined term of 5 years, and a minimum payment of $350, with an interest rate of 6.7%.
TOTAL TIME: 59 months to pay off (just under 5 years)
TOTAL COST IN INTEREST: $2,953
TOTAL COST OF PURCHASES PLUS INTEREST: $20,453
SAVINGS = $16,000 (!!!)
This is real math, people. And it highlights just how hard it is to get out of credit card debt once you are being strangled by super high interest rates. With a debt consolidation loan, it’s possible to save money and get out of debt way faster (Plus the mental relief of having all those credit cards paid in full is no small bonus.)
Who Is a Debt Consolidation Loan Good For?
Debt consolidation loans are a good option for anyone who wants to get out of the seemingly endless cycle of making credit card payments and getting nowhere. The primary benefits of a debt consolidation loan are:
- Reducing the number of creditors you pay to a single payment
- Reducing the amount of money you will pay in interest
- Due to a lower interest rate
- And a defined endpoint (i.e. the term of the loan)
- Reducing your overall monthly payment
All in all, you will have less stress because you will have a clearly defined path to being out of debt.
When you apply for a debt consolidation loan, the lender will assess your history of borrowing, total your debt, and work with you to land on a monthly payment you can afford. And the interest rate you qualify for is based on a combination of your income and your credit score. The lowest interest rates are awarded to those with the lowest debt-to-income ratios, naturally. But this does not mean that you cannot secure a favorable rate for a debt consolidation loan if you have low credit, or a lot of debt. Especially since credit card interest rates are so high.
Debt Consolidation Can Set You Up for Success
Consolidating your debt may be the best path forward for getting it all straightened out: a single payment, reduced interest, and a clear endpoint. If that is how it plays out for you, then debt consolidation will have done exactly the trick you needed it to, and you will be able to walk away in a better financial position.
Taking time to learn about options that are available to you to help reduce the amount of debt you carry and your stress levels is a good use of your time. Options are available, but it is up to you to decide to use them. Make a phone call today and learn more.
