3 Ways Debt Consolidation Can Change Your Life
Debt consolidation can be the first step in a long-term plan leading to healthier finances.
Borrowing money for the "fun of it" is never a good idea. Unless you have a specific reason to borrow, debt can weigh you down, prevent you from planning for the future, and cause stress. If you don't have the funds in your bank account to get rid of your debt, a debt consolidation loan may be the best way to rid yourself of the financial weight quickly, saving you money in the process.
Gets you out of debt faster
Maybe you're a social soul and think nothing of pulling out a credit card to pay for a night out with friends or a weekend trip you don't have the cash to cover. Or perhaps you've found yourself in a financial rut and occasionally need to charge necessities, like food or diapers. In either case, a debt consolidation loan may save you money. Here's how:
Discover: These personal loans are best for debt consolidation
More: Prequalify for a personal loan without impacting your credit score
Let's say you have three credit cards, each carrying an interest rate of 17%. On the first card, you have a balance of $3,500. On the second, you owe $5,000, and on the third, $10,000. That's a total of $18,500. Between the three cards, you're making a minimum payment of $555. You've decided to pay that same amount monthly until the credit cards are paid off, even if the minimum amount due drops.
Card #1: Your monthly payment is $105. At this rate, you'll have it paid off in 46 months and pay a total of $1,270 in interest.
Card #2: Your monthly payment is $150. This card will also be paid off in 46 months, and you'll pay $1,815 in interest.
Card #3: Your monthly payment is $300. Like the others, this card will be paid in full in 46 months, but you'll pay $3,630 in interest.
With those numbers, it will take almost four years to pay off the debt (if you don't use any of the cards in the next 46 months) and you will pay a total of $6,715 in interest.
Now, imagine that you take out a personal loan to consolidate this debt. You don't want to carry the debt for nearly four years, so you choose a 36-month term. Your credit score is good, so you're offered an APR of 9.50%. Your new monthly payment goes up by $38 to $593, but you pay the debt off in 36 months instead of 46, and you pay a total of $2,834 in interest instead of $6,715. That's a savings of $3,881.
Frees up money to invest
Once you rid yourself of high-interest debt, you have more in your pocket each month, money you can invest for future goals. Let's say that instead of paying credit card debt, you put $500 a month in an investment paying an annual average return of 7%. In five years, that investment will be worth $35,206. After 10 years of investing, you will have $83,882, and in 20 years, regularly investing $500 per month will leave you with $247,908.
Could make you happier
A Capital One survey recently revealed that around 45% of Americans worry about the debt they carry. Further, according to a study by The Ascent, 83% of people without debt claim to be satisfied with their lives, while 70% of those with debt say the same. A full 97% thought they would be happier without debt.
That's not to say that paying off debt will magically transform you from an unhappy worrywart to a blissed-out dreamer. Still, it can give you a greater sense of control and direction regarding your financial decisions.
Debt consolidation is one step in developing an overall plan for improving your financial situation. Others include creating a realistic budget that allows you to rid yourself of other debt, save for emergencies, invest in your future, and do what you dream of doing. Although there are several steps you must take to become financially healthy, the process often begins with consolidating high-interest debt.
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