July 30, 2021
Addition by subtraction means accomplishing more with less — for example, using a personal loan for debt consolidation.
When you borrow money to pay off credit card balances and other high-interest accounts, you combine multiple monthly expenses into a single, more manageable bill that may help you improve your overall fiscal health.
If you're in the process of weighing the pros and cons of taking out a personal loan, here are the top five reasons to streamline your personal liabilities with a debt consolidation loan.
1. No Surprise Interest Rate Hikes
Interest on credit cards (and many other forms of debt) is typically calculated using a variable annual percentage rate (APR), which fluctuates with changes in the prime rate. This means the amount you ultimately pay in interest can go up or down based on shifts in the global financial market. That means less control over how much you'll have paid your lender when all is said and done.
Most personal loans, on the other hand, have fixed rates. When you take one out to refinance debt, you "lock in" a rate and establish the total amount of interest you'll pay over the life of the loan.
2. Lower Payments and Interest Charges
Generally, interest rates for personal loans are lower than for credit cards and other unsecured debt. So, you stand to save money in both the short and long terms by using a personal loan to combine higher-interest bills.
For example, if you paid off $10,000 in outstanding credit card debt with a 24-month personal loan at the national average interest rate of 9.46%, your monthly loan payment would be around $460. The total interest charges for the term: about $1,015.
Meanwhile, if you chose to pay down a $10,000 balance over two years at the average 15.91% credit card rate, you'd owe roughly $490 each month. You'd also pay more than $1,700 in interest.
Depending on the amount you borrow and length of the agreement, you can potentially avoid hundreds or even thousands of dollars in interest charges using a personal loan to consolidate payments.
3. Improved Credit Score
Although it seems a bit counterintuitive, borrowing money to cover other loans can help improve your credit score — in time.
For starters, paying off credit card balances and high-interest accounts with a personal loan reduces your credit utilization ratio, which represents roughly one-third of your credit score. Using 30% or less of the total amount of credit you have available — and primarily staying below that threshold — boosts your score by showing lenders you're not overspending or relying heavily on debt.
What's more, dealing with one loan payment rather than multiple accounts should make it easier to meet your other financial obligations. Eventually, your credit score will climb as you build a history of paying your loan (and other bills) on time, every time.
Dealing with one loan payment rather than multiple accounts should make it easier to meet your other financial obligations.
4. Fewer Accounts to Maintain
Expenses aside, adding credit cards, student loans, medical bills, and other expenses to your list of "regular" bills (mortgage, rent, utilities, car payments) greatly increases your financial workload. This can lead to late or missed payments, which will lower your credit score and make it harder to qualify for lending in the future.
Merging multiple forms of debt with a personal loan simplifies the overall process. By reducing the number of accounts you have to manage, you can devote less time and energy to coordinating multiple due dates and minimum payments, focusing instead on paying down a single source of debt.
Simplifying your payments means you'll be less frazzled from day to day. Instead of logging in to multiple online accounts or rummaging for that bill that came the other day, you'll have more space in your life for being creative, tending to your emotional well-being, and being present with friends and family. In short, consolidating debt can actually restore your sanity!
5. Enhanced Cash Flow
Creating and sticking to a budget is difficult under the best circumstances. It borders on impossible if you don't have a grasp of when, where, why, and how your money flows in and out each month.
Debt refinancing helps by establishing a fixed repayment schedule. Having a single loan to pay down and knowing the exact amount you're responsible for each month allows you to more accurately project income and expenses and maintain a more consistent cash flow.
Regardless of your motivation, a personal loan can be a viable way to decrease your level of high-interest debt, reduce your number of financial obligations, and save money now and in the future.
That's the type of addition by subtraction that makes sense in most any setting and application.