The most common type of debt consolidation loan is a credit card debt consolidation loan, often obtained from a bank or finance company. If you owe money on your credit cards and are paying a high rate of interest on those credit cards, a credit card debt consolidation loan may be the correct option for you.
Here's how it works. First, you start by making up a monthly budget to determine how much you can afford to repay each month on your credit cards. Make sure your budget includes all of your monthly expenses, including items like gifts and other expenses that don't occur every month.
With a monthly budget, you will know how much you can afford to pay on your credit card debt consolidation loan each month, so that you don't agree to a loan with payments higher than what you can afford.
What are the advantages of credit card debt consolidation?
The most obvious advantage of a credit card debt consolidation loan is that by consolidating many credit card payments into one loan you will probably reduce the amount of interest you pay.
Let's consider a simple example. Let's assume you owe $30,000 to five different credit card companies. You owe $6,000 to each of Visa, MBNA, Capital One, American Express, and Mastercard. They are each charging you 18% interest per year, so your interest charges alone amount to $450 per month.
That means that if all you can afford to pay is $450 per month to each of your Visa, MBNA, Capital One, American Express, and Mastercard credit cards, you will never pay off your credit cards. All you are paying is the interest, so after ten years of paying $450 per month, you would still owe the original $30,000!
Now let's assume that you get a credit card debt consolidation loan for $30,000 at a bank, credit union, or other lender at an interest rate of 9% per year. Since the interest rate is half what the credit cards were charging, you are now only paying $225 per month towards the interest on your loan. If you continue to pay $450 per month towards your new credit card debt consolidation loan, in the first month of the loan $225 goes to interest, and $225 goes towards principal, which means you are actually repaying the loan, instead of just paying interest.
That's the power of a credit card debt consolidation loan! By consolidating your credit card debts at a lower interest rate, you can get out of debt faster than if you tried to pay your credit card debts on your own.