Overwhelmed with credit card debt? You’re not the only one. According to Experian, the average credit card balance is $6,194. Credit cards tend to have high interest rates — the Federal Reserve reported that the average APR is 16.97% — which can cause your balance to grow over time.
If you just make the minimum payments, it can take years to pay off your credit card debt. You could end up paying far more than you originally charged due to the high interest rates. So what can you do?
One strategy is to take out a debt consolidation loan. For some borrowers, this approach can help them save money and become debt-free. Below, find out how debt consolidation works and how much you can save.
What is debt consolidation?
To consolidate your debt, you take out a personal loan from a bank or online lender called a debt consolidation loan. You use the loan to pay off your current debt, including credit cards and medical bills.
Unlike credit cards, which are revolving forms of credit, debt consolidation loans have fixed repayment terms. You’ll repay your loan over the next two to seven years with fixed monthly payments.
Rather than having to juggle multiple due dates and minimum monthly payments, a debt consolidation loan combines your debt together. That way, you have only one due date to remember and one payment to make each month.
Debt consolidation loans tend to have much lower interest rates than credit cards. If you have good credit and a stable income, you could qualify for a rate as low as 4.99%, helping you save money.
Because you use the loan to pay off your current balances, taking out a debt consolidation loan can even help improve your credit score. By eliminating your balances, you decrease your credit utilization, boosting your credit.
How effective is consolidating your debt?
While personal loans have lower interest rates than credit cards, you may not think it makes that much of a difference. But consolidating your debt can allow you to save thousands of dollars — and pay off your credit card balances months or even years earlier.
For example, let’s say you had $10,000 in credit card debt on a card with 18% APR. With a minimum monthly payment of $300, it would take you 47 months to pay off the balance. In total, you’d repay $13,967.21. Interest charges would cost you nearly $4,000.
But let’s say you consolidated your debt with a personal loan. If you qualified for a three-year loan at just 5% interest, your monthly payment would be $299.71. But, you’d pay off your debt 11 months earlier. And, you’d repay just $10,789.52. Consolidating your debt would allow you to save $3,177.69.
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How to apply for a debt consolidation loan
While you can apply for a debt consolidation loan at many banks or credit unions in-person, there are several lenders that allow you to apply online. You can complete the application in just a few minutes, and get a decision right away.
To apply, you’ll need to collect the following information:
- Your name
- Social Security number
- Desired loan amount
- Current rent or mortgage payment
- Employer name and address
- Proof of income, such as pay stubs or a W-2 form
If approved, you could receive the money from the loan in as little as one business day. Lenders will disburse the money directly to your bank account, usually through electronic deposit. It’s up to you to use it to pay off your current creditors.
The bottom line
If you’re struggling with high-interest debt, taking out a debt consolidation loan can be a smart way to save money and pay off your balances.
However, make sure you carefully review your finances and come up with a budget before applying for a loan. Identify the reasons why you got into debt in the first place. Perhaps you lost your job, were going through a medical emergency, or were using shopping as a coping mechanism. Whatever the reason, make sure it’s fixed before moving forward with a loan application. If you don’t address the root causes behind your spending, a debt consolidation loan will just worsen the problem.
If you decide that a debt consolidation loan is right for you, check out these lenders for debt relief.
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