The path you take to get out of debt can be smooth for some. But for many of us this includes bumps, twists and turns. There are tools to help you on your journey, designed to help you achieve your financial freedom plan while keeping more of your money in your pocket.
A debt consolidation loan is a strategy for managing your existing financial obligations . You can potentially collect your balances in one place, minimize your countdown to fully pay off and eventually remove high interest rates. It all comes down to whether it suits your particular situation.
How does debt consolidation work?
A loan can help you turn your existing debt into a new fixed monthly bill . The goal is that your new loan offers a lower interest rate than you currently pay on other loans.
To qualify for a debt consolidation loan, you apply for a loan and select “Debt Consolidation” as the goal of your application. The lender transfers your approved funds to your bank account, which you then use to pay your credit balances, medical bills, or even other loans. For consolidating student loans , the lender will likely send the money directly to your creditor.
After repaying your debts, you only have one loan to repay at the fixed rate and repayment terms you have underwritten with your new lender.
How much will a debt consolidation loan cost me?
Ideally, a debt consolidation loan will not cost you anything you would not already pay in interest with your existing loans. Some debt consolidation loans come with origination fees – usually between 1% and 5% of the amount of your loan, which are often deducted before you receive the money – but it is possible to find a consolidation loan. offering no initial costs.
When weighting consolidation loans, your APR and your monthly repayments are two other costs to consider. In general, you must have excellent credit and a low debt ratio in order to benefit from the lowest annual interest rates, ranging from 5% to 10%.
You might be concerned about the immediate costs, though. In this case, a longer term loan could meet your needs. You will end up paying more because your interest accumulates in the longer term. But your monthly repayments can be significantly lower than those of a shorter duration .