Borrowing money for “fun” is never a good idea. Unless you have a specific reason for borrowing, debt can weigh you down, prevent you from planning for the future, and cause stress. If you don’t have the funds in your bank account to get rid of your debt, a debt consolidation loan can be the best way to quickly get rid of the financial burden, saving you money as well.
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Get out of debt faster
Maybe you’re a social soul and don’t think about pulling out a credit card to pay for a night out with friends or a weekend that you don’t have the money to cover. Or maybe you’ve found yourself in a financial rut and sometimes need to charge for basic necessities, like food or diapers. Either way, a debt consolidation loan can save you money. Here’s how:
Let’s say you have three credit cards, each carrying an interest rate of 17%. On the first card, you have a balance of $ 3,500. On the second you owe $ 5,000 and on the third $ 10,000. That’s a total of $ 18,500. Between the three cards, you make a minimum payout of $ 555. You’ve decided to pay that same amount monthly until the credit cards are paid off, even though the minimum amount owed goes down.
Card # 1: Your monthly payment is $ 105. At that rate, you will have paid it off in 46 months and you will pay a total of $ 1,270 in interest.
Card # 2: Your monthly payment is $ 150. This card will also be paid off in 46 months and you will pay $ 1,815 in interest.
Card # 3: Your monthly payment is $ 300. Like the others, this card will pay off in full in 46 months, but you’ll pay $ 3,630 in interest.
With those numbers, it will take almost four years to pay off the debt (if you don’t use any of the cards in the next 46 months) and you’ll pay a total of $ 6,715 in interest.
Now imagine you take out a personal loan to consolidate that debt. You don’t want to carry the debt for almost four years, so you choose 36 months. Your credit score is good, so you are offered an APR of 9.50%. Your new monthly payment increases from $ 38 to $ 593, but you pay off the debt in 36 months instead of 46 and you pay a total of $ 2,834 in interest instead of $ 6,715. That’s a savings of $ 3,881.
Free up money to invest
Once you get rid of the high interest debt, you have more in your pocket each month, money that you can invest for future goals. Let’s say instead of paying off credit card debt, you invest $ 500 per month in an investment that earns an average annual return of 7%. In five years, this investment will be worth $ 35,206. After 10 years of investing you will have $ 83,882 and in 20 years regularly investing $ 500 per month will leave you with $ 247,908.
Could make you happier
A Capital One survey recently found that about 45% of Americans are worried about the debt they carry. In addition, according to a study by The Ascent, 83% of people without debt say they are satisfied with their life, while 70% of those who are in debt say the same. 97% thought they would be happier without debt.
That’s not to say that paying off debt will magically transform you from a hapless worrier to a blissful dreamer. Nonetheless, it can give you a greater sense of control and direction over your financial decisions.
Debt consolidation is one step in developing a comprehensive plan to improve your financial situation. Others include creating a realistic budget that allows you to get rid of other debt, save for emergencies, invest in your future, and do what you dream of doing. While there are several steps to be taken in order to become financially healthy, the process often begins with consolidating high interest debt.