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CUT YOUR REPAYMENT COSTS WITH DEBT CONSOLIDATION
December 12, 2015
Juggling bills from multiple high-interest accounts, such as credit cards or
education loans, can give you fits. If that’s happening, consider debt consolidation. Using lower-rate financing to pay off what you owe with one monthly stroke can simplify your financial life, save interest costs, and shorten the time it takes to be done with it all or reduce what you pay each month.
To make this work, you’ll need a willing lender and the self-discipline to keep up with the new payment without fail. A good credit score can help; so can equity in a home. A low- or zero-interest balance transfer offer may provide another alternative if you’re not quite ready for some of those other options.
The point of consolidating debt is to cut your costs while simplifying the task of managing your finances and maybe even shortening the pay off time. This can make sense to handle a variety of burdens, from card balances to medical bills and student loans. The key is to find low-cost financing for a sufficient amount of money that will enable you to eliminate high-rate balances.
For homeowners, lending backed by the equity in your property can provide a rock-bottom rate. Also, you may be able to get a tax benefit by deducting the interest, which can further reduce what you’ll pay overall. Alternatives include a home equity loan and a home equity line of credit, or HELOC. But there’s a considerable risk, since if the payments aren’t made, your house may be in jeopardy of foreclosure.
Another attractive option can be a personal loan. Lenders like Central Sunbelt Federal Credit Union may offer rates as low as 8.75% on unsecured borrowing for as long as five years. To see how much you could save at various rates, run the numbers on this debt consolidation calculator. You might be able to save some serious cash.
For instance, if you owe $2,500 on an account charging 21% interest, $1,800 on another at 17%, $3,700 on a car loan at 12% and $7,500 for that unexpected hospital stay, you may be paying $485 a month combined. Using a $15,500 unsecured loan at 8.75%, you could cut your monthly payment by 73% to $131 and save more than $1,500 on total remaining interest costs.
If you kept paying $485 a month, you’d cut your interest costs by 85% to $1,431 from $9,605. And you’d be done in less than three years instead of 10. Consolidating can be well worth the trouble.
If your credit score isn’t what it could be and you don’t own a home or have other assets to secure financing, using a balance transfer to a credit card offering no or very low interest for an introductory period could be another way to save some money. Generally, the optimal approach to this method is to transfer only as much as you can pay off within the introductory period, before the rate on the balance returns to normal. Don’t forget to factor in the transfer fee, often as much as 4%, that will be rolled in to what you owe.
Consolidating your debt won’t reduce it, but it can make life more manageable while cutting the cost of paying it all off.