Should You Consolidate Your Debt?
Written by Brenda Spiering
Friday, March 16th, 2018
Is your debt spiraling out of control? Are you paying monthly interest charges on several credit cards and other sources of debt?
Have you ever signed up for an in-store credit card to take advantage of a great offer? Who hasn't, right? But while that extra 20% off may have seemed like a good deal at the time, it only remains so if you pay off the bill in full and on-time.
Credit cards – in particular, store credit cards – charge some of the highest interest rates of all forms of debt. If you end up carrying an outstanding balance on multiple credit cards, you may want to consider a debt consolidation loan or line of credit.
What's Debt Consolidation?
In simple terms, debt consolidation involves taking out a new loan or line of credit and using it to pay off existing higher rate debts. This saves you money by reducing your overall interest charges. Plus, moving from multiple bills to one monthly payment can help simplify your finances.
Personal Loan vs. Line of Credit
A personal loan provides you with a set amount of money that you repay according to a fixed schedule. A line of credit enables you to draw the amount you need when you need it (up to a pre-approved limit) and to pay it back anytime you want, as long as you make the required minimum monthly payments.
Home Equity Line of Credit
If you own a home, Carl Pierce, Tangerine's Director of Retail Lending Products, says a good option can be a home equity line of credit. It allows you to borrow up to a certain percentage of the value of the equity you've built up in your home. And because the loan is secured against your home, it has the advantage of carrying a lower interest rate than an unsecured loan or line of credit.
How Much Can You Save?
Consolidating debt at a lower interest rate can result in significant savings.
"The minimum interest payment on $50,000 of debt at 9% is $375 per month," explains Pierce. "At 4%, the minimum interest payment on that same debt is reduced to $167 – a saving of $208 per month."
This makes it possible for you to pay off your debt faster, says Pierce. "It would take you 5 years to pay off $50,000 of debt at 9% at $1,038 per month. If you reduced the rate to 4%, but kept your monthly payments the same, you could pay off the loan 7 months earlier and save $7,100 in interest."
You Still Need to Pay Back the Loan
The important thing to keep in mind when consolidating debt and lowering your required monthly payments is that you still need to pay back that loan. "The biggest risk is that once you get a lower minimum payment, you take the difference and spend it," says Pierce. "The idea is to move to a lower rate but use the savings to pay the loan off faster – with a disciplined repayment plan, the savings can be substantial."
This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content....
The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.
Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.