What is debt consolidation?
Debt consolidation is when you combine your debts into one single payment. The loan makes paying bills easier with one monthly payment for all the debts combined.
There are two significant benefits of consolidating debt. First, depending on how many different bills you’ve combined and how often you were missing payments, you may reduce late fees from multiple lenders. This figure can add up to a significant amount each month.
The second benefit is saving money by lowering your annual percentage rate. You’ll often lower your interest rate, which in turn reduces your total debt and monthly payment. Please see the current annual percentage rate available online – debt consolidation loan rates.
How do debt consolidation loans work?
Debt consolidation loans merge your existing debt into one unsecured personal loan. You may combine any previous obligations such as credit cards, medical bills, outstanding contracts, or any other outstanding debt payments. The primary debts to combine are ones that have a higher annual interest rate, monthly service fees, or late fees. Merging these into one lower monthly payment with a lower interest rate saves fees and additional interest costs.
Furthermore, unlike credit card debt, interest on a debt consolidation loan is not compounded interest. Compounded interest builds interest on unpaid interest previously collected. In comparison, a consolidated loan has a fixed rate without compounded interest.
A borrower applies for a specific loan amount covering the debts or speaks directly to a loan officer to find a solution that works best for their budget. Either way, the debt settlement now has a single monthly payment with a set loan balance and a specified repayment period. You’ll get free of debt in no time because your debt relief now has an end goal you’re working toward. With each monthly payment, you’ll see your outstanding balance go down.
Do I need to close out my credit cards to get a debt consolidation loan?
Not always. Money FCU’s debt consolidation loan is different from a debt management program or negotiating your debt with the lender. When you negotiate or use a debt management program to repay credit card debt, they negotiate a lower total payment for payment in full. In doing so, you agree to close the account with them. Equally, the lender agrees to take a loss but gets a negotiated payment to close an unsecured credit line account that is high risk. This type of debt negotiation is otherwise known as debt settlement.
The benefit of a Money FCU debt consolidation loan is you may be able to keep your former credit card accounts open, especially if they’ve been open a long time. That’s because your credit score takes into account the length of time a credit card has been open. So, if you have a credit card that’s been open for 20 years, you don’t want to close that. As long as it’s not maxed, which if you’re paying it off with a debt consolidation loan, shouldn’t be, it will help your credit. By closing them, you won’t be tempted to use them again and get yourself in the same position that you’re trying to fix.
We certainly understand the need to have a credit card though, especially for emergency situations, renting a car, or other unexpected situations.