The basic idea behind debt consolidation is simple. Take a bunch of loans at high interest rates and replace them with one loan at a lower interest rate. For example if you have $5,000 on each of three credit cards and each credit card company charges you 24% interest rate. You also have an autoloan for $4000 that is charging you 8%. You will be paying $3600 in interest on the credit card debt and $320 per year on the auto loan. If you get a consoidation lona for $19,000 at 7% you can pay off all of the loans and just have one payment each month. Better still you will only be payihng $1,330 in interest per year saving you $2590 each year.
If you take the savings from the consolidation loan and apply it to the principle of what you owe, you’ll be able to pay off your debt much faster than you would be able to by keeping them separate. In fact if you just make the same payment you would have made when paying interest only on the 4 separate loans, you’ll still pay off the consolidated loan in 7 years.
Thats the power of debt consolidation, the same amount of money that you would normally spend on interest alone can pay of your debt in a reasonably short amount of time. If, in the above scenario, you were to make the same payment as was required for the 4 loans, you’d pay it off even more rapidly.
Debt consolidation is a powerful tool, but be aware that there is expense involved. Most companies are going to charge you money to setup the consolidation loan. You’ll have to do the math to make sure that consolidation makes more sense than just paying off your high interest rate loans on an accelerated schedule yourself.
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