How to Consolidate Debt

Eeeek this sounds so serious, right? It’s just fancy terms for a simple act of combining your debts into one loan. 

Long story short, say you have 3 credit cards with $1,000 balances on each. If you consolidate that debt, you’re starting a new debt for $3,000 that will pay off each of those 3 credit cards. 

Why would you do that? There are a few reasons. The first is that it is very likely that the minimum monthly payment for each credit card added up is much more than what you would pay monthly for the new $3,000 loan that I just mentioned. Maybe you’re paying $25 for one card, $45 for another, and $60 for another for a total of $130 in payments a month. 

It’s very likely that your new loan is going to have a monthly payment less than what the three other payments add up to (in our example, $130). You can pocket the savings, or keep paying $130/mo on the new loan and pay it off faster. 

The second reason consolidating your debt might be a good idea for you is that your interest rate for the new loan might be lower than your current ones. Credit cards usually have higher interest rates than loans. They’re sometimes even 20%-30% which is why even though you make a payment every month, your balance doesn’t seem to go down as much as it feels like it should. 

You can get personal loans to consolidate debt – these are called unsecured loans. Stick with me, I promise this will be worth it. Or you can consolidate your debt into what’s called a secured loan. A secured loan means that there’s something with value backing up the loan, like a vehicle or a home. Secured loans usually have lower interest rates because the lender feels more secure giving you the cash because, well, if you don’t make your payments, they can just take the car or house. 

Real quick before we wrap this one up, why does the interest rate even matter? Because it costs you less money in the end. Sometimes other things matter more than that, like an urgent need that’s worth a higher interest rate, but if your goal is to pay off debt a lower rate can help you put more of your money towards paying off debt and not the cost of the debt.