Debt Consolidation 101: How to Get the Most from Your Loan (Part 2 of 3)

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Debt is stressful. So it’s not surprising that managing lots of different debts all at once can be really, really stressful—like taking a trip with your five-year-old kid to the Soda, Candy and Priceless Antique China store. Consolidating your debt can help.

In order to consolidate debt, you simply take out one larger loan and you use it to pay off all your smaller loans. It makes your debt load much easier to handle, and it can also save you money in the long run.

There are many ways to go about consolidating your debt, and some ways are definitely better than others. For those who are looking to simplify their personal finances, here are some OppLoans tips for how to best consolidate your debt:

1) Longer Terms, Lower Payments

There are three things that determine a loan’s monthly minimum payment: the principal, the APR and the term. The principal refers to the amount of money that’s borrowed, the APR (which stands for “Annual Percentage Rate”) is how much you get charged in fees and interest on a yearly basis, and the term is the period of time over which the loan is to be repaid. And it’s this last factor that will hold the key to lowering your monthly payments.

Simply put, a loan with a longer term is going to require a lower monthly payment than a loan of with a shorter term. (Of course, we’re assuming that these two loans have the same principal and APR.) If you have a personal loan with high monthly payments and a 12-month term that is putting a strain on your budget, consolidating it into a loan with a three-year term will result in a lower amount owed each month.

If you owe too much each month, consolidating into a loan with longer terms is probably worth it. Learn more in Debt Consolidation: A Small Solution to a Big Problem.

2) Lower Rates

If you have a lot of debt, odds are that some of it is on credit cards—and credit card debt comes with high interest rates. In fact, the rates on your credit cards are probably the highest rates out of all your debt. They’re like that friend who comes to your party, eats way more than their share of pizza, and insists on arguing about politics. Getting that kind of debt out of your life is going to be a huge relief to your finances and your mental health (plus more pizza).

There are a number of personal loans out there that carry lower interest rates than your standard credit card. And you might even be able to find rates that are lower than the rates on some of your other personal loans. Be careful though—especially if you are a homeowner—about taking out a second mortgage to consolidate your debt. There are additional risks with that kind of loan that you’ll want to take into consideration.

Now, this might not be possible for everyone. Getting lower interest rates depends on having a high credit score. For those out there who don’t have a great credit score, you might not qualify. Always make sure to do the math when you’re taking out a debt consolidation loan, so that you have a handle on the cost.

3) Introductory Offers

To be clear, this is not a maneuver for amateurs. This is like a blindfolded triple-luxe backwards half-pipe shimmy. It only works if you have a solid plan for paying down your debt, and for doing it ahead of schedule. We’d say don’t try this at home but…where else are you going to do it? The circus. (Disclaimer: Please don’t get a loan from the circus.)

Just like 70% of the earth’s surface is covered in water, 70% of all mail is actually credit card offers. A lot of those offers advertise stuff like “0% APR for 18 months,” and while that might sound like gibberish, it’s actually a pretty good deal. 0% APR means that you are not paying any fees or interest on that card’s balance. Every dollar you pay goes towards paying down the actual debt.

It’s easy to see how owing 0% in fees and interest on a credit card would be pretty handy. It allows you a window wherein the cost of borrowing is essentially free. If you are able to pay down that entire balance before the 0% APR period is off, then you’ve saved yourself a lot of money.

But if you don’t pay off the debt, then you’ve got another credit card with a high interest rate. That’s why this isn’t a good idea for people without a solid debt repayment plan. And make sure before you try it, that the 0% APR also applies to balance transfers. If it only applies to new purchases, then it’s pretty much useless.

For more information or to get started on a single personal loan you can use to attack your consolidated debt today, click below or call us at (800) 990-9130. The application process is quick and easy, and won’t affect your credit score.

Blog Series: Debt Consolidation 101
Part 1: Debt Consolidation Basics
Part 2: How to Get the Most from Your Loan
Part 3: Three Mistakes to Avoid