“ Consolidating debts into one payment can help you manage your money better, reduce stress and pay off debt quicker, but you still need to be smart about it."
Key Takeaways:
Pay off credit cards and other high-interest debt.
Consolidate multiple debts into a single lower-interest loan payment.
Get your finances back on track.
By: Allan R Kirby
The frugal lifestyle
Being frugal means you choose to spend your money wisely but for many, it's not easy getting started. There is an adjustment period that can be difficult for some to get through.
Additionally, when you decide to get your finances in order and want to live a much more frugal lifestyle you may be saddled with a lot of high debt and not sure what to do. This is where debt consolidation comes in. It's a way to get rid of debt with lower interest rates along with more manageable payments. The first step to becoming frugal is getting your house in order as well as making adjustments to your spending.
Why debt consolidation?
Debt consolidation can be a smart way of getting rid of multiple high-interest debts such as credit cards and refinancing them into a single personal loan with lower interest and manageable payments. If for example, you are dealing with high levels of credit card debt and limited income you are likely getting squeezed by the high interest you are paying for serving those debts. As a result, you could end up taking years to pay off those loans and struggling while doing it.
Is it smart to consolidate debt?
By using a personal loan to consolidate your high-interest credit card debt could save you a lot of money on interest. This is because you will be putting all of your debt into a manageable personal loan that is likely under 8% compared to credit cards which can easily be 18% or higher.
Let's look at some examples to help you understand, We assume no new spending:
$5,000 in debt (Plan to pay off in 36 months)
Credit Card Payments
Balance: $5,000
Rate: 16%
Monthly Payment: $175.80
Total Interest Paid: $1,328
Total Paid: $6,328
Personal Loan Payments
Balance: $5,000
Rate: 8%
Monthly Payment: $157
Total Interest Paid: $641
Total Paid: $5641
That's a $687 difference over just a 36-month period. The money you could be using to build your savings account or pay off other debts.
$15,000 in debt (Plan to pay off in 48 months)
Credit Card Payments
Balance: $15,000
Rate: 16.5%
Monthly Payment: $420
Total Interest Paid: $5,173.00
Total Paid: $20,173
Personal Loan Payments
Balance: $15,000
Rate: 8%
Monthly Payment: $364
Total Interest Paid: $2483
Total Paid: $17483
That's a $2,690 difference over just a 48-month period and best of all you also have lower payments as well. The money you could be using to build your savings account or pay off other debts. If you are able to get a personal Personal loan for just 6% which is more than possible, you will actually pay just 1,857.00 in interest and save an additional $625 in just 48 months. The power of lower interest rates is really telling.
What is the quickest way to get out of debt?
As shown above, the quickest way to get out of debt especially if you have high-interest credit cards is to:
1. Consolidate your debt into a personal loan.
2. Cut your high-interest credit cards and stop spending.
3. Focus on paying off your personal loans as quickly as possible.
4. Live a frugal life.
Are Consolidation Loans Worth It?
Yes, but only if you follow through by not using your high-interest credit cards and limiting your spending to essentials or by taking a more measured approach to how you live and spend on items that are not essential to your needs.
Getting Started with debt consolidation
You have seen some examples as to why you should, so now you need to figure out how to get started with getting a personal loan and consolidating debt. The following provides some steps you need to take to get started with finding a personal loan that works for you.
Step 1: Determine how much you need:
This is actually very important because you need to sit down and look at all of your debt to determine how much you need to pay it off. It will also help you get an idea of the amount of debt you have. You may actually be surprised about how much you owe. You would be shocked by the number of people who are struggling but do not really know how much they actually owe.
"Not sure what to do, seek help with your local bank or credit union to get a better idea on what you should and should not do. "
Step 2: Find a financial institution to help you out.
I am very surprised by the number of companies online that promote debt consolidation that is in reality more like scams because they provide a service that can cost you much more in fees, higher interest rates, and other hidden costs. Go to a bank or credit union and avoid being put in an even more difficult position by quick and easy online loans.
Do Credit Unions offer Debt Consolidation Loans?
Yes, this is something that many may not know, but you can go to a credit union and work with a service representative to see how they can help you consolidate your debt into a personal loan. It may be easier to get a loan through a couple of clicks but you may not know what you are getting into. Credit Unions and banks are highly regulated and I have never had an issue using them.
This is the single most crucial step when you are actually looking at a personal loan, it will define how you will pay off the debt along with the interest rate you are given and the amount of money paid. Never hesitate to negotiate a rate with a bank or credit union. I have done this successfully before, it never hurts to ask.
Ask questions
Make sure you understand your personal loan, you need to understand how long it will take to pay it off and how much you will save by consolidating the loan. You can also find out ways to pay off the loan earlier and to ensure no extra fees will be placed on your loan if you are paying it off early.
Step 3: Get the loan, pay off the debt, and make changes.
Once you have your personal loan, the focus is not only to pay off your debt but to make changes to how you are using your credit cards. In fact, getting those high-interest credit cards paid off is actually the easy part for many people, the hard part is making changes to your living habits by avoiding overspending.
"Always discuss with a reputable financial institution, avoid online companies that ask for money up front while also providing quick and easy solutions."
What are the risks of debt consolidation?
The single biggest risk is consolidating your debt to pay off your high-interest credit cards only to use the credit cards to run up more debt. This is common with many people who just cannot find a way to stop spending. It's absolutely critical to get control of your spending and cut those high-interest credit cards if you are not able to manage additional spending. Running up additional credit card debt while you have already consolidated your previous debt will likely end up causing major issues not only with your credit score but also with your ability to service all the debt.
Consolidating debt into a single manageable monthly payment is a great idea to save money and get rid of debt faster while also working towards a more frugal lifestyle. In the end, you will feel less stressed, more empowered, and happier with your life. However as explained, you still need to be careful to ensure you get a lower-interest loan from a reputable financial institution and you cannot continue to run up debt.
Frugal Living is a segment of the MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos.