Is a Debt Consolidation Loan Right for You?

As I was writing the following section in my next personal finance book that I’m working on, I figured that it was too exciting not to share on the blog, especially since the holiday credit card using season is upon us. Check it out. It’s quick, dirty, and to the point. I hope it can help you.

Be informed if you choose an option to consolidate your credit card debts into a debt consolidation loan.

Using the credit cards below, your total payments, interest, due dates, and balances are as follows:

Credit Card 1 $90 (3% of balance) 15.9% 22 May $3,000
Credit Card 2 $75 (3% of balance) 22.9% 18 May $2,500
Credit Card 3 $45 (3% of balance) 29.9% 17 May $1,500

You are currently paying $210/month in minimum credit card payments. You have a $7,000 total balance on your credit cards.

At these interest rates and minimum payments, calculated as 3% of your outstanding balances, it would take you the following times to pay these credit cards off in full:

Credit Card 1: 150 months!

Credit Card 2: 200 months!

Credit Card 3: 287 months!

Furthermore, although you have a total existing balance of $7,000, you’ll pay a total of $18,424 over the course of 287 months (23 years) before your credit card balances will be eliminated.[1]

Debt Summary

Balance Interest Rate Monthly Payment Interest Paid Total Payments Time to Payoff
Card #1 $3,000 15.9% $90.00 $2,141.78 $5,141.78 150 months
Card #2 $2,500 22.9% $75.00 $3,798.08 $6,298.08 200 months
Card #3 $1,500.00 29.9% $45.00 $5,483.99 $6,983.99 287 months
Totals $7,000 21.4% $210.00 $11,423.85 $18,423.85 23 years and 11 months

 

So, a debt consolidation loan may be for you if you want to lower the monthly total amount that you are paying towards credit cards, as long as you don’t begin using your credit cards again once the balances are paid.

A possible debt consolidation loan scenario can consolidate your credit card debts into a 10 year loan with an interest rate of 7.5%. This accomplishes two things.

First, it can possibly “increase” your monthly take-home pay by decreasing your monthly obligated expenses:

Old credit card payment totals: $210

New payment with consolidation loan: $83.09

Total monthly “increase”: $126.91

Second, it can give you an absolute date on when your credit card debt will end because you now have a fixed monthly payment.

But, if you pay off your credit card balances with a debt consolidation loan and subsequently run up your credit card balances again, you will eventually increase the total amount of your debt paid, which is stupid!

 Check out Bankrate’s Debt Consolidation Loan Calculator here and run your own scenarios.

I love writing to reflect on life, in general, but the focus of my writing is personal finance. I exist to teach you how to navigate the personal finance world and then master it! Through my writing you'll learn how to minimize your financial stress, maximize your savings, and then pursue the life that you are destined to live. Don't miss out on any future posts! Be sure to subscribe to the blog.

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One comment on “Is a Debt Consolidation Loan Right for You?
  1. Mike says:

    Good Post Romeo. I have been my own worse enemy over the years, consolidating unsecured revolving debt, and then going back to using it again. Sooner or later, you learn :)

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