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Consolidation Loans have a Lower Interest Rate
The biggest advantage is that you should be able to get a lower rate of interest from a financial institution than the rate charged by your credit cards and consumer loans for electronics, furniture, etc. The less interest you pay, the quicker you can pay off your debts. For example:
- If you have a combined debt load of $20,000 at an average 20% interest rate (which is quite easy if your main creditors are credit cards and big box retailers), then you have to pay $4000 a year-or $333 every month--in interest before you even begin to touch the principal owed of $20,000.
- On the other hand, if you can get a consolidation loan that pays off your multiple creditors and has an interest rate of 7%, you only have to pay $1400 a year in interest ($117 per month). Simply reducing the interest rate means that you can pay down an extra quarter of your debt ($5200) in two years without having to increase your monthly payments.
- To put it another way-at a 20% interest rate, making combined payments of $500 a month, it will take you 5 years and 5 months to pay off your cards and you’ll pay over $12,250 in interest on that original $20,000. At an 8% rate, putting down the same $500, you only pay $2,690 in interest and you pay off your debts 19 months faster.
Clearly, if you are eligible for one, a consolidation loan offers a big financial advantage.
Consolidation Loans make for Easier Tracking
One of the feedback loops created by debt worry is that dealing with financial responsibilities becomes increasingly stressful. Unopened bills pile up in a corner, awaiting the day when an individual has the resources to pay them. But that day rarely arrives. The sheer number of bills to be paid becomes daunting.
With a consolidation loan, many former payments are rolled into one. This makes it much easier to keep track of what is owed. Also, the debtor no longer has to deal with multiple due dates, with the attached penalties for late payment.
Consolidation Loans Can Improve Your Credit Rating
If you can qualify for a consolidation loan and subsequently meet the repayment terms, it can improve your credit rating. This means that it will be easier to get a loan in the future and that you will get a better interest rate, because one of the factors used by lenders to determine the interest rate is the risk factor involved in lending money to you.
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