{"id":949,"date":"2017-07-09T18:03:10","date_gmt":"2017-07-10T01:03:10","guid":{"rendered":"https:\/\/financer.com\/?page_id=949"},"modified":"2025-02-23T20:44:12","modified_gmt":"2025-02-24T04:44:12","slug":"debt-consolidation","status":"publish","type":"wiki","link":"https:\/\/financer.com\/loans\/articles\/debt-consolidation\/","title":{"rendered":"Debt Consolidation Loans"},"content":{"rendered":"\n

What Is Debt Consolidation?<\/h2>\n\n\n\n

Debt consolidation is a method used to combine all your debts into a single loan with the goal of simplification, lower interest rates, and lower monthly payments<\/strong>. <\/p>\n\n\n\n

The benefit of this approach is that you can pay off all your high-interest rate balances with a low-interest rate loan.<\/p>\n\n\n\n

This eliminates the process of having to pay multiple statements every month and managing the balancing act of paying multiple small loans simultaneously. <\/p>\n\n\n\n

What’s more, debt consolidation can also reduce your interest rate<\/strong> and help you pay off the debt even more quicker.<\/p>\n\n\n\n

This process alleviates the pressure of repaying high-interest loans and allows you to pay the principal debt off in a shorter amount of time.<\/p>\n\n\n\n

High amounts of debt can put you in a difficult financial situation and could lead to bankruptcy if it is not managed appropriately. A debt consolidation loan<\/a> may help you prevent this outcome and rebuild your credit.<\/p>\n\n\n\n

How Does Debt Consolidation Work?<\/h2>\n\n\n\n

A debt consolidation loan<\/strong> is similar to refinancing a loan. A new consolidation lender pays off each of your current outstanding loans. <\/p>\n\n\n\n

The payments made to your current lenders cancel each loan agreement with them and merges all debts into one single new loan with the consolidation lender.<\/p>\n\n\n\n

The difference between a refinancing loan and a debt consolidation loan is that a consolidation loan pays off multiple lenders, whereas generally, refinancing only pays off one loan.<\/p>\n\n\n\n

There are various debt consolidation agencies, and their focus is to provide you with relief from your high-interest debt. <\/p>\n\n\n\n

That said, circumstances differ between borrowers, so it’s essential to compare lenders to find a loan<\/a> that matches your financial needs.<\/p>\n\n\n\n

Simple Debt Consolidation Case Study<\/h3>\n\n\n\n

Here is an example of how a consolidation loan could work. Let\u2019s say you have a total of $20,000 of debt owed over three credit cards<\/a> and two personal loans<\/a>. <\/p>\n\n\n\n

Assume the average interest rate and APR<\/a> total 25% annually among the five debts. Using a simple interest scenario at 25%, the $20,000 in debt owed would accumulate $5,000 in interest each year.<\/p>\n\n\n\n

In reality, most personal loans and credit cards have compounding monthly interest and fees, which may be much higher than the example above. <\/p>\n\n\n\n

While each scenario is different and will depend on your repayment schedule, high-interest debt is very difficult to pay off.<\/p>\n\n\n\n

Using a debt consolidation loan with a 7% annual interest rate for the $20,000 debt in the above example would save $3,600 in interest per year<\/strong>. That\u2019s a lot of extra money that could be used toward paying the principal debt off.<\/p>\n\n\n\n

This scenario is simplified to illustrate the principle of consolidation lending. <\/p>\n\n\n\n

Most personal loans and credit cards are based on compounding rather than simple interest. Therefore, the interest payments<\/a> would be far higher per year.<\/p>\n\n\n\n\t\t

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Is Debt Consolidation Right For You?<\/h2>\n\n\n\n

A debt consolidation loan is one of the more popular debt-management options. They generally offer favorable terms and are more flexible with their payment options. <\/p>\n\n\n\n

The three main benefits of debt consolidation are: <\/p>\n\n\n\n

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  1. Reduced interest payments<\/li>\n\n\n\n
  2. Quicker payment of principal<\/li>\n\n\n\n
  3. Simplification of debt load and management<\/li>\n<\/ol>\n\n\n\n

    You can compare online lenders here <\/a>to find the lowest interest rates and best terms<\/strong>. It is essential to know your current interest rates and APRs are on each of your credit cards and personal loans. <\/p>\n\n\n\n

    There is no point consolidating if you are not reducing your interest rate. <\/p>\n\n\n\n

    > Compare personal loan rates<\/a><\/strong><\/p>\n\n\n\n

    Reduce Interest Payments<\/h3>\n\n\n\n

    The primary purpose of debt consolidation is to reduce the high-interest payments in exchange for a lower interest debt consolidation loan.<\/p>\n\n\n\n

    Other lenders may offer similar\u00a0personal loans<\/a>\u00a0or\u00a0unsecured loans<\/a>. Still, these sometimes come with a higher interest rate since they are not tied to relieving your debt.<\/p>\n\n\n\n

    \ud83d\udca1 Tip<\/strong>: Taking out a debt consolidation loan does not reduce your debts<\/strong>.<\/p>\n\n\n\n

    While a debt consolidation loan will not lower the amount owed, your interest rate and payment terms will have been adjusted. <\/p>\n\n\n\n

    The hope is that you will be able to pay more principal off by reducing the amount of interest you need to pay annually.<\/p>\n\n\n\n

    A debt consolidation loan may be perfect for you if:<\/h3>\n\n\n\n