Debt Consolidation Loan for Your Debt Payoff Strategy - Money Tip Tuesday

The beginning of a new year is a great time to assess your financial situation, particularly if it’s following a holiday spending spree—unfortunately, there have been some years when that assessment sheds light on a  harsh reality.

If you're ready to tackle your seasonal shopping debt, and some of the other debt that’s been hanging around too long, this tip shares how a consolidation loan is the right financial tool to help pay down debt in the new year. 

• View our current Debt Consolidation Personal loan rates and terms.
• Watch our Financial Freedom: Your Path to Being Debt Free webinar to start your own debt payoff strategy

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Transcript: 

Welcome to Money Tip Tuesday from the Making Money Personal podcast. 

I find the beginning of a new year to be a great time to assess my financial situation, particularly if it’s following a holiday spending spree—unfortunately, there have been some years when that assessment sheds light on a  harsh reality. Today, I’ll share how a debt consolidation loan can be used in your debt payoff strategy, but first let me explain what a consolidation loan is and how it works.  

Actually, the product name pretty much explains exactly what kind of loan it is—it’s a consolidation loan, meaning, as a credit union member, you transfer your high interest debt to a loan at a lower interest rate. This type of loan is usually used to transfer multiple debts, which is really where the concept of “consolidating” comes in—I have all of these debts at higher rates, being transferred or consolidated into one loan at a lower interest rate.  It may be best to explain it with an example. I have a credit card balance of $3,000 from a big retail store at a 19.99% interest rate, another credit card from an airline (because I get points) with a balance of $4,000 at a 14.99% interest rate, and a $2,000 personal loan at a big bank at 11.99% interest. Each month, I’m paying about $700 in payments for all of these bills. If I consolidate all of these loans into one loan, at a lower rate, my monthly payment would be reduced significantly. In this example, my new consolidation loan balance is $9,000 at a current interest rate of 7.99%--if the term of this loan is 60 months, my new monthly payment would be around $200 a month.  

Some people are leery of consolidation loans as financial tools because they’ll argue all I’m doing is transferring debt. And once the debt is consolidated, it gives me a false sense that the debt is taken care of and then I have freedom to spend more. If that’s all that the consolidation loan was used for, than I would agree, but here’s how it’s used as a smart financial too: 

Once my debts are consolidated and my payment is reduced from $700 a month to $200 a month, I can use that $500 difference to pay down the principal of the new consolidation loan. If I did that, my $9,000 loan would be paid off in roughly 12 months! Since I’m paying to principal, my debt will be paid off sooner, plus the interest rate is lower than all the other loans, so I’m saving money on interest paid. 

Here’s are a couple of more bonuses: when I repay my debt sooner, I’ll increase my credit score! And, consolidating all of the loan payments just makes it easier for me to manage. 

To recap, when consolidation loans are used responsibly, they are a great financial tool that can be used in reduce interest and save me money. Any savings, can be used to pay down my new loan, which again will save me more and put me on the path of debt free living. 

Hopefully you found this episode helpful. If so, we would like to hear from you about thoughts on this show or maybe you have some ideas on other topics we should cover,  email us at tcupodcast@trianglecu.org. Be sure to subscribe to the Making Money Personal podcast for our full episodes and weekly Money Tips wherever you listen to podcasts and follow us on Facebook for more great content. 

Thank you to listening, and thank you to our sponsor, Triangle Credit Union. 

Have a  great day everyone!