Debt consolidation may be the perfect personal finance solution that can make you debt-free. If you are looking to learn about this topic, you have landed at the right place.
In this guide, I will discuss everything about debt consolidation, consolidation calculators, its uses and its limitations.
What is Debt Consolidation?
In simple terms, debt consolidation is a refinancing technique used to amalgamate various debts and make them one.
The liabilities you clip together can be done so by getting a consolidation loan. There are quite many benefits for consolidating several loans and credits as one, but only if it is done correctly.
Is it a Good Idea to Consolidate Debts?
Consolidating your debts might be a good idea for many people and might not be an effective way to manage debt. It all depends upon your financial standing and preferences.
Debt amalgamation is a good way to get rid of various debts that are constantly sucking money out of you like a leech. Having a small and a medium amount of debt usually causes you to pay a higher interest rate.
If you are unable to pay back the principal amount, I would recommend that you consolidate your debts.
There are many pros of debt consolidation, I have listed some of them below:
Lower Interest Rate
Credit cards, short term loans, and other small miscellaneous borrowed amounts can make up a higher interest rate (APR). However, if you join them all together and take a personal debt consolidation loan, the interest rate will drop down in a significant manner.
Fixed Payment Amount and Period
You will not have to worry about different due dates and calculation of various payments in a month. It will be extremely easy for you to make a budget for your loan and pay it on a fixed due date and in a fixed amount.
Just put a standing order for payment and you are good to go. No more hassle for different calculations and debt budgeting.
Positive Effect on your Credit Score
Getting a consolidation loan has its benefits but due to this loan, you will be able to simultaneously improve your credit rating. If you were to pay different debts to different lenders, you are more likely to miss the monthly payment.
Paying back to one lender, you have more chances of making a timely monthly payment. This will have a huge impact on your payment history, which weighs for almost 35% of the credit scoring given by the financial conduct authority.
The consolidated loan has a fixed monthly payment schedule which helps pay off the initial debt amount sooner. If you have a substantial amount of credit card debt, one thing you might know is that they have no time limit of the monthly payment, thus making it difficult to follow a strict monthly debt payment system and also increasing the interest payments.
There might be some drawbacks to amalgamating a loan as well. Usually, these include loan application costs and balance transfer fees. Still, if managed properly, the benefits surely outweigh the limitations.
Average Interest Rates for a Debt Consolidation Loan
The interest rate will depend on several important things, it will vary for every person and you might be able to get a higher or lower interest rate depending on the following criteria:
The most important thing that banks and lending institutions usually look at is your debt rating or score. The interest rate and allowance of a consolidation loan will heavily depend on your credit status.
If you have a credit score between 880-960, it is a good credit rating according to Barclaycard. With this kind of credit score, you will be able to secure the loan on a fairly low-interest rate, ranging from 11-15% on average.
A credit rating higher above this will make it a piece of cake for you to avail of an interest rate of around 8%-10%.
Loan Amount & Payback Period
The rate of APR also depends on the loan. If you are looking for a small amount of loan, you might get quoted a high rate of interest by the lender. On the other hand, if you are looking for a fair amount of loan, you will be able to bag a lower interest rate.
The logic of this scheme is that lending institutions can grab better profits on the long term and fair amount loans as compared to the short term loan, hence, to increase their profits in the short term, the quote higher interest rate.
Long term loans with bigger amounts will fall between 15%-20% (with a fair credit rating) and short terms debt loans can vary between 20-25%.
Debt Consolidation Calculators
The easiest way to find out whether consolidating debt is right for you or not is by using the debt consolidation calculator. This calculator will work out your consolidation amount, interest rate, and estimated monthly payment.
You will just need to enter your pending dues, credit card balance (if any), and all the other debts that you owe. The debt consolidation calculator will quickly sum up the debts and give you consolidation quotes.
There are many free debt calculators, such as the Calculator.net has a pretty good debt calculator. You can also get the debt calculator from the lending institution site that you are choosing to get a debt loan.
How much debt can I consolidate?
It depends on you and the lending institution that you are going to get the loan from. The allowance of the loan will determine how much debt you can amalgamate and it depends on your credit score and previous monthly payment history.
I would advise you to consolidate only the high-interest rate debts, such as credit card and other short term debts. Do not get yourself in a long term debt that you can not manage and get out of.
Can I consolidate credit card debt?
Yes! You can consolidate your credit card debt. For instance, if you are paying 20% interest on your credit cards, consolidating them may drop the interest to 10%-15%, thus saving you a lot of money.
Do debt consolidation loans hurt my credit score?
If not managed properly, they might harm your credit score but it also allows you to increase your credit score positively. If you manage the loan and arrange the payment amount timely, your credit score might improve!
Why does my credit score matter to get a consolidation loan?
Your credit score is a reflection of your debt management skills. If you have a fair or good debt record, that means creditors are more likely to trust you and lend you a loan.
The credit score is not only important for consolidation but it has overall importance while availing any type of credit.
Are debt consolidation calculators reliable?
Yes! By using a debt calculator, you can easily calculate various things related to the loan. For instance, the interest payable and the monthly payment amount.
These calculators are quite reliable just like any other calculator, however, if you still have any doubt about them, you can use the one you find suitable for your needs.
A Quick Recap
Consolidating your debts is a good finance technique but to do it correctly, you need to understand how and which debts to consolidate.
I hope this article helped you understand the demographics of debt consolidation and the use of debt calculators. If you need further assistance, please feel free to reach us out.