Can Consolidating Debt Save you Money?

Written By Alla Levin
January 05, 2018

Can you combine debt to reduce overall costs?

Debt consolidation involves bringing all your existing debts together into one new, more massive debt. It can make life easier to manage and simplify the financial commitments that you have.

But can consolidating debt save you money?

When does consolidating debt save you money?

Simpler interest calculations

You may have three or four different types of debt, each with a different interest rate, some higher and some lower. Consolidating debt could help you to save money by paying off all of those existing debts with a new loan that has just one, more manageable interest rate by making your debt repayment more predictable.

Lower interest rates

The idea behind debt consolidation is to use a cheaper loan to pay off multiple more expensive types of debt. So, you might have an old loan that you took out when your credit score wasn’t quite as good as it is now and the interest on that is 20%. Plus you may have a credit card which has been spent up to the limit and is attracting an APR of 22%. If you consolidate both of these debts into one new loan, for example, and that loan has an interest rate of 15% then you are instantly making a saving on the interest that you’ll pay on the total you owe.

Consolidating credit card debts

Lower interest rates

Credit cards often get people into trouble because, once you’ve paid them off, the temptation is just to spend again. If you’ve repeatedly tried to clear those credit card balances but you just end up spending what you’ve repaid (and so continue to pay interest on it) consolidating those credit card debts could save you a lot of cash. Choose a 0% credit card or a personal loan and use it to repay those old cards. Close the cards straight away so that you’re not tempted to spend again.

If you’ve chosen a 0% credit card then you’ll have the time to clear the balance without the crippling interest. If you’ve chosen a consolidation loan then, after you’ve made payments, you won’t have the chance to spend what you repay and attract more interest in it.

Avoiding missed payments

If you have multiple debts, especially if they have high-interest rates like bad credit loans or no credit check loans, then keeping track of the repayments can become quite problematic. You might have payments coming out on different dates throughout the month, some of them towards the final week when finances are pretty tight. Missing payments on debt always incur a financial penalty, usually a lost payment penalty charge.

Simplifying multiple debts by consolidating them will ensure that you have just one monthly payment to make. So, there’s much less chance of you missing debt repayments and incurring fees and charges as a result.

When does consolidating debt not save you money?

  • If you are already paying low-interest rates
  • If you don’t have particularly large balances to repay
  • If your credit score will prevent you from getting a good deal of interest
  • If there are high early repayment fees to pay on existing debts
  • If you take out the consolidation loan and spend it on something else

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