Bill Consolidation: What is it &How it Works

If you have several debts that you are working to pay down but find yourself scrambling to make sure you don’t miss anything, a bill consolidation loan and app can help. However, it is important that you note the amount that you are transferring and avoid taking on additional small debts while you pay down this larger loan.

What is Bill Consolidation?

Bill consolidation or as it is more commonly called debt consolidation is the process of taking out a new larger loan to pay off other several debts you may have. This way you will “consolidate” multiple debts into one loan. This can have its benefits such as lower interest rates or lower installments. However, it can also have its own share of disadvantages.  

To combine all of your previous debts, you can choose which kind of loan you wish to take out. It could be a home equity loan, a new credit card with a higher limit, or a personal loan. Then you pay your smaller debts using this larger loan money. If you are using a new credit card to pay off the debts on your previous credit cards, you can transfer the balance to your previous cards. 

How Does Bill Consolidation Work

Let’s say that you have two credit cards and a total amount of $20,000 is due to be paid. The annual interest rate on them is 20%. This means that for two years, you will have to pay $1,167 each month in order to clear off the entire debt. You would pay a total of $8,000 in interest. However, if you combine all the debt and get a new credit card that has a lower interest rate of let’s suppose 11% per year, you would pay a lot less amount. Then the total amount of interest would only be $4,400. Approximately half of what you were paying before!

Benefits of Consolidation Loans

A bill consolidation loan can help you to

  • reduce the interest rate if you have credit card debt
  • avoid late fees if you might miss a payment
  • build a simpler budget

With a debt consolidation loan, you will still owe the same amount of money as you did previously. This is not a bill settlement program. However, with all the debts rolled into one, you can more easily make the payments and manage the rest of your income.

High-interest credit card debt can be exhausting and create a lot of stress. Getting calls because you were busy and missed payment is also frustrating, especially if you had the money in the bank. By rolling your debt into the right consolidation loan, you can make just one payment per month.

Risks of a Debt Consolidation Loan

If you are using a debt consolidation loan to wipe out high-interest credit card debts, review the cards that you just paid off. If any have an annual fee, cancel them to avoid that expense. If they don’t, keep them active but put them away so you don’t use them. Consolidating your debt is only effective if you don’t add to it.

Now that you know what your monthly payment will be, set up an account at a credit union that offers free checking and debit card use. Use that instead of credit cards to buy your necessities. If you have a history of challenges using a credit card, change things up and go back to cash for your

  • weekly consumables shopping
  • rent if you have a drop-off
  • utilities if not already on autopay

Working with cash forces your brain to think about money a bit differently. You may need to make a few more stops each week, but you may find that you have more money at the end of each month after you go back to cash.

Applying for a debt consolidation loan may be a hard pull on your credit. If your rating is in rough shape, apply with care.

Where to Get a Consolidation Loan

The simplest form of loan consolidation is the credit card rollover. If you can get a card that offers 0% APR for an extended stretch of time, you will likely have to pay a small fee, but you can roll many smaller cards onto a bigger one to save hassle and time each month. Before you do this, make sure you know what the total debt will be and that you can pay it off within the time allotted.

Having a credit card debt that is close to the max is hard on your credit. You can also get a personal consolidation loan from other sources, but you should be prepared to pay higher interest on that debt.

If you own a house and have built equity, a home equity loan is another option for you to consolidate the debt. Home equity loans are secured loans and therefore offer interest rates that are quite lower than the interest rates on credit cards.

If you have student loans piling up, check with your national banks or government loan offers. Usually, governments offer avenues to consolidate student loans. They offer consolidation loans at an interest rate that is average of all your previous loans. This way you can pay back in smaller monthly installments. However, the total repayment period gets stretched.

Once You Have Some Breathing Room

Once you have a consolidation loan in place, take a breath and look at what got you to a place where you needed a consolidation loan. If your ability to earn took a hit during the pandemic, look for ways to increase your number of revenue streams. The term of your consolidation loan could serve as the time you commit to taking on a second job.

Commit all the dollars from the second job to the debt. While you are pushing hard on that, take a look at your spending habits and when you tend to go overboard. If you overspend on the weekends, look for ways to earn at that time. If you love to eat out or get a drink with friends and tend to blow the budget then, cut back to every other weekend to make the event more special and protect your cash flow.

A bill consolidation loan, properly managed, can be incredibly freeing and save you a lot of interest. Put this tool to work only when you are sure that you will not overspend once you have some financial breathing room.

The Bottom Line

The bill consolidation process can help you get rid of your piling loans faster while also allowing you to save some money in the meantime. However, it is not the right path for everyone. Before committing to a bill consolidation, do your research and make sure you know all the details such as loan options and interest rates. Otherwise, you could end up piling even more loans.

 

Author:  Allison Lurie