Home Money & Finance A Short Guide to Taking Out a Consolidation Loan

A Short Guide to Taking Out a Consolidation Loan

by Olufisayo
Consolidation Loan

Raise your hand if you have debt.

Raise your other hand if you are struggling to pay the said debt.

Stand up if you want to get rid of your debt quickly.

Now that we have got your attention, let us tell you what you need to do.

Suppose you have 3 credit cards, and you owe around $20,000 on all of them at a 22.99% annual compound rate monthly. Based on these numbers, you will have to make monthly payments of$1,047.37 for 2 years. The balance will then come to zero with $5,136.88 paid as the interest.

Now, consolidate the credit cards with the help of a bank or an online lender like Jacaranda Finance and go for a low-interest rate at an11% annual compound rate monthly. The amount will drown to $932.16 monthly for 2 years. Your overall interest on the debt would be $115.21, which saves you $2,765.04.

The same goes for a 28% annual compound rate monthly, even if the monthly payments are fixed. You will still end up paying $5,441.73 in interest. Let’s look at the outcome if the debt is consolidated:

Consolidating 3 Credit Cards
Details Credit Cards Consolidation Loan
Interest 28% 12%
Payments $750 $750
Term 28 months 23 months
Bills 3 1
Principal $5,000 x 3 = $15,000 $15,000
Interest $1,813.91 x 3 = $5,441.73 $606.74 x3 = $1,820.22
Total $20,441.73 $16,820.22


Things to Consider When Taking Out a Debt Consolidation Loan

So, now that we have established that a debt consolidation loan is a great option to pay down your debt, what now? Well, there are a few things you need to consider. One, this loan will only benefit you if you can get a loan that surpasses your current paying plan.

Below are a few more factors you should consider when applying for this loan:

Interest Rates

Just because your debt is being consolidated doesn’t mean the new interest rate charged will be low. To find out whether you will be saving money or not, calculate how much you have to pay in interest rate for all your debts. Now, compare that with what you will be paying on a single interest rate. If the monthly payments and the annual compound rate are low, only then choose the loan option.

How Much Will It Cost to Consolidate Your Debt

How many times has someone told you to read the fine print before signing any contract? Sometimes, when your debt moves between lenders, you may have to pay a small fee. Following are some of the most common fees:

  • Debt Consolidator Fee: You will have to pay a fee for taking out a new loan.
  • Switching Fee: Your current lender will charge you for moving your debt to another lender.

Settle on a Repayment Plan

There are two options to pay back a loan:

  • First, you choose smaller monthly payments and pay back the loan over an extended duration.
  • Second, you choose large monthly payments and pay back the loan in a short duration.

Of course, the latter option is better because the former will cost you more in interest rate. However, not many people can make large monthly payments, which is why they end up choosing longer terms. Now, you need to find how much you can stretch your payments and settle on that sweet spot between affordable and living like a miser.

Make Sure You Will Be Able to Handle the Monthly Payments

Before taking out a debt consolidation loan, ask yourself: Will I be able to keep up with my monthly payments? You are already in debt. So, don’t add to it if you are not sure about the plan. Yes, the monthly payments will be lower and you will have a small room to set aside some money for your personal expenses. However, if you go overboard for one month, a missed payment will create big problems for you.

Always shop around for affordable interest rates before choosing a lender. The purpose of a debt consolidation loan is to free up some room at your expense. If the interest rate is high, you won’t be able to do that. Lastly, read the contract thoroughly to make sure there are no add-ons written in between, as well as any charges on late payments. Find out if the lender offers a grace period to help you out if you accidentally miss a payment.

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