Debt can weigh heavily on you, making you desperate for relief. Often, no matter how much you throw at your debt, it feels as if you just can’t move the mountain. This is typically due to high interest rates that prevent you from touching the principal. If you’re one of the many struggling to get out from under your debt, debt consolidation programs like those at Symple Lending can help. Learn more about debt consolidation and whether it can work for you in the guide below.
The Basics of Debt Consolidation
In simple terms, consolidating debt is trading several small loans for one larger loan. For example, imagine you owe five $100 loans, which comes out to a principal balance of $500. Consolidating your debts would mean taking out one $500 loan that pays off the smaller loans, leaving you with only one loan to manage.
This example seems simple enough, but it likely leaves you wondering what the benefit of taking out a new loan is – especially if it’s for the same amount as your other loans. Two of the main benefits involve interest rates and the length of your loan term.
Interest Rates
Going back to the five loans you currently have, imagine the following as their interest rates:
- Loan 1: 36%
- Loan 2: 17%
- Loan 3: 22%
- Loan 4: 18.5%
- Loan 5: 15%
This brings your total interest to $108.50 in addition to the $500 principle. If that interest is calculated and added each month – known as compound interest – you have to pay the $108.50 every month just to keep your loans current. None of that is shrinking the principle.
Consolidating your debt typically means getting a lower interest rate, especially if you’ve been able to keep your loans current. Additionally, most debt consolidation loans add the interest at the beginning of the loan period, meaning that it is not calculated each month. Instead, every payment you make is being split between the interest and the principal.
Loan Terms
Many debt consolidation loans are approved for longer terms. Depending on the total borrowed, your loan term might be anywhere from a few months to several years. This results in lower monthly payments, which can give you room to breathe and a much higher chance of paying off your loan.
Is It Right for Me?
Please note that the example mentioned above is using smaller loan amounts, but debt consolidation is just as beneficial for larger amounts owed. If you owe multiple debts at all, working with an experienced debt consolidation agent is worth considering. However, it’s not for everyone.
In some cases, you might find that the interest rate is higher with a debt consolidation loan. You might also have to pay loan origination fees and other additional expenses. And if your debt is already close to being paid off, it might cost you more to consolidate than to simply finish what you’re already doing. In short, whether it’s the answer for you depends on your specific situation.