For many people, a debt consolidation loan is the only option for them to get out of debt. High-interest credit cards with high balances often mean that very little of the payment is going towards the principal. If only the minimum balance is being paid on multiple cards, less than a third of the combined payments may actually go towards the debt.
Most credit card statements these days will actually show how much the final debt will be if only the minimum payment is being made. For instance, a card with a balance of £3,200 with an interest rate of 17.9 percent may have a minimum required payment of £83 per month. If only that amount were paid, it would take 15 years to pay off the debt, with a final total of £7,200! Now imagine that over several cards with even higher interest rates (some cards are close to 30 percent).
The first obvious benefit of debt consolidation is in getting a better interest rate. With good credit, it is reasonable to expect an interest rate well under 10 percent for a loan. Even with bad credit, you can surely secure a loan for much less than 18 percent or more. This means more of each payment is going directly to the principal, getting you out of debt that much quicker.
One Payment Instead Of Many
You will also now only have to make one payment and it will likely be lower than the combined minimal payments of multiple credit cards. Having multiple payments can be difficult for some, as it can be inviting to skip the payment and try to beat the penalty date. Now, when that date comes and goes, the interest rate climbs even higher and a penalty is now attached to the card, increasing the overall debt instead of decreasing it.
In addition to the monetary benefits, there is also the fact that securing the loan and paying off the balances of the other credit cards will actually increase your credit rating quicker. Since the debt is being paid off quicker, your debt to available credit ratio increases faster. You may actually see movement on your credit report in just a few months.
You should also consider that many debt consolidation services will offer free credit counselling as part of the package. Instead of struggling with your monthly budget, a personal planning expert will be able to discuss your monthly income and how to best allocate the funds every month.
Most people find that they are spending money wastefully on things they do not really need. Eliminating these items, if even for a limited time, frees up more money to help them get out of debt quicker or allows them to finally put some money into their savings in case of emergency.
If you qualify, securing a debt consolidation loan can make your life much easier. It allows you to get out of debt quicker, eliminates phone calls from credit companies, reduces your interest rate, and makes managing your monthly payments much easier. Finally, you will be able to see the light at the end of the tunnel and get out from all of the debt that has been holding you back.