If you have found yourself in a position where you have run out of financial options, a debt consolidation loan can help with managing your monthly payments and lowering your overall interest costs.

Value of Debt Consolidation

A debt consolidation loan takes many different types of debt and rolls them into one loan. The new loan can result in a lower overall interest rate, lower monthly payments or both. 

Spending Habits 

Our spending habits can put us in a position of requiring debt consolidation. Once you have your new debt consolidation loan in place, you will still have the same credit cards in your wallet, but now with a $0.00 balance. You may have carried credit card balances for many years on these cards and only covered the minimum interest payment. Remember that these cards are not paid off; this debt is moved elsewhere and spread out over a longer term. While it is positive that you are now dealing with the principal amount of the credit card debt, the danger is that you still have that credit card and your spending habits have been questionable. 

New Debt Consolidation Loan  

Now you will be dealing with the reality of loan payments with a longer term. Your monthly costs will have dropped if you extended the payment terms. Are you disciplined enough to leave your credit card at home or even lower the balance on your cards? If you are questioning yourself, you may want to consider talking to a credit counselor and working on developing new habits with spending before you get into trouble again. If you run up these credit cards again, you may not have the option of taking another debt consolidation long and be worse off than when you started this process.

Deciding on the Best Direction With Debt Consolidation 

We have developed an example of debt for $27,468.00 from four different sources. In the debt consolidation loans offered below, we are looking at the credit history and annual income to determine what interest rate would be offered by the lender. 

You will see in these examples:

The faster the pay off your loan, the less interest you will pay

Debt consolidation can lower your monthly payments but cost you a great deal of interest

The value of your credit rating for better interest rates 

This example shows someone’s debt with the plan of paying everything off in two years or applying for debt consolidation to save money

 

Debt Holders

Total Owing

Interest Rate

Monthly Payment

Total Interest

Visa

$6,450.

22%

334.82

$1,585.68

Dental Bills

$4,245.

12%

$199.89

$552.36

Personal Loan

$12,528.

8%

$566.73

$1,073.52

MasterCard

$4,245.

24.99%

$226.14

$1,195.80

Total

$27,468.

16.75%

$1,328.14

$4,407.36

 

Debt Consolidation Examples

Example 1: 

Credit Score 720 – 850

Annual Income $75,000.00 / year

Interest Rate: 6%

 

Consolidation

Total Owing

Interest Rate

Monthly Payment

Total Interest

12 month Loan

$27,468.

6%

$2,364.46

$905.52

24 month Loan

$27,468.

6%

$1,217.46

$1,754.40

36 month Loan

$27,468.

6%

$835.77

$2,619.72

48 month Loan

$27,468.

6%

$645.19

$3,501.12

60 month Loan

$27,468.

6%

$531.12

$4,399.20

Current Interest

 

$1,328.14

$4,407.36

 

Debt consolidation will save this debt holder: 

24 month interest saving - $2,652.96

Monthly Payment lowered by - $110.68 / month 

Example 2: 

Credit Score 650 - 719

Annual Income $60,000.00 / year

Interest Rate: 9%

Consolidation

Total Owing

Interest Rate

Monthly Payment

Total Interest

12 month Loan

$27,468.

9%

$2,402.71

$1,364.52

24 month Loan

$27,468.

9%

$1,255.18

$2,656.32

36 month Loan

$27,468.

9%

$873.48

$3,977.10

48 month Loan

$27,468.

9%

$683.71

$5,350.08

60 month Loan

$27,468.

9%

$570.33

$6,751.80

 

Current Interest

  

$1,328.14

$4,407.36

 

Debt consolidation will save this debt holder:

24 month interest saving - $1,751.04

Monthly Payment lowered by - $72.96 / month 

Example 3: 

Credit Score 580 – 649

Annual Income $40,000.00 / year

Interest Rate: 13%

Consolidation

Total Owing

Interest Rate

Monthly Payment

Total Interest

12 month Loan

$27,468.

13%

$2,453.37

$1,972.40

24 month Loan

$27,468.

13%

$1,305.88

$3,873.09

36 month Loan

$27,468.

13%

$925.51

$5,850.20

48 month Loan

$27,468.

13%

$736.90

$7,903.09

60 month Loan

$27,468.

13%

$624.98

$10,030.80

Current Interest

 

 $1,328.14

$4,407.36

 

Debt consolidation will save this debt holder:

24 month interest saving - $531.27

Monthly Payment lowered by - $22.26 / month 

Example 4: 

Credit Score 400 - 579

Annual Income $30,000.00 / year

Interest Rate: 16% 

Consolidation

Total Owing

Interest Rate

Monthly Payment

Total Interest

12 month Loan

$27,468.

16%

$2,492.20

$2,438.34

24 month Loan

$27,468.

16%

$1,344.92

$4,810.05

36 month Loan

$27,468.

16%

$965.69

$7,296.96

48 month Loan

$27,468.

16%

$778.45

$9,897.64

60 month Loan

$27,468.

16%

$667.97

$12,610.10

 

Current Interest

 

$1,328.14

$4,407.36

 

Debt consolidation will save this debt holder: 

24-month interest saving – ($402.69) Loss

Monthly Payment Increased by – ($16.78 / month) 

With Example 4, the only reason you would consider debt consolidation would be to lower your monthly payment. The interest rates exceed your current loans and will increase your interest costs.

We would not recommend a debt consolidation loan and recommend trying these options:

1.  Do not consolidate and apply for 0% interest credit cards. They are offered interest-free for 12 months. Take the extra cash and pay down your debt. If your credit is not strong enough to do this, talk to your credit card provider and ask for help. The key being, talk to them.

2.  Contact your existing lenders and ask to extend the terms of the current loans and request a lower interest rate. If you are uncomfortable doing that;

3.  Contact a credit counselor and or debt relief expert to work with your creditors and set up payment terms. They charge fees for this service and you can do this on your own.

These examples should help you see just how much your interest cost increases as you stretch out your loan.

Is it a Wise Move to Consolidate Debt? 

Everyone's financial position is different:  Different income, family dynamics, credit cards, loans, and unexpected life occurrences.  You will have to decide if a lower monthly payment is necessary and you need to stretch out your debt. Saving on interest is always wise.

We have attempted to show you a real-life example of what you will be offered to in the marketplace. Try our loan calculator here to run your own debt and see if debt consolidation has value to you.

If you decide to go a lender and complete their documentation, you will have a quote to compare your existing loans. You do not have to take the loan. 

Disclaimer

The credit scores, annual income, and interest rates are our numbers only and are examples only from our research in the market. 

  1. Debt consolidation definition CFPB acquired May 10, 2018 - "Consolidation means that your various debts"