Summer has come to an end and with the holiday season right around the corner, now is a great time to take a closer look at your finances and make some changes if necessary. A TopCashback.com study from 2019 shows that 45% of Americans spend the most during summer compared to 35% spending the most during Winter, 11% spending the most during Autumn and 9% in Spring.  

If you are in the same boat, a consolidation loan might be one solution to get your finances in the right place and prepare yourself for the holiday season ahead! Before we share how a debt consolidation loan can be used in your debt payoff strategy, first let us explain what a consolidation loan is and how it works.  

The product name pretty much explains exactly what kind of loan it is—it’s a consolidation loan. This means that you transfer your high interest debt to a loan with a lower interest rate. This type of loan will take multiple debts with higher interest rates, consolidate them and transfer them into one loan with a lower interest rate, ultimately saving you money in the long run that you will no longer need to spend on interest.   

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 of rewards 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 total for these three debts. If I consolidate 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 make arguments such as, “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 then it would be a valid statement, but there are other benefits to it as well.  

Here’s how it’s used as a smart financial tool: 

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 the 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. 

Once the debts are paid off, your credit score will increase which allows you to meet other financial goals easier. Not to mention, consolidating multiple debts into one loan payment makes them much easier to manage. When consolidation loans are used responsibly, they are a great financial tool that can save you money in just interest alone. Any savings you receive from this can be used to pay down your new loan, which again will save you more and put you on the path to debt free living. 

If you think that a debt consolidation loan is right for you, check out our loan options here!