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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.
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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.
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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.
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