A slash in rates could mean a slash in your debt if you play your cards right
If you’ve been struggling with high-interest debt or juggling multiple credit cards to stay afloat, you’re not alone. US consumers owe a record $1.14 trillion in credit card debt, according to the Federal Reserve Bank of New York. However, the recent Fed rate cuts may offer the break many have been waiting for.
The Fed cut rates by 0.5% at its September meeting, so interest rates on personal loans are likely to drop, too. These rate cuts mean you’ll have a chance to refinance what you owe at a better rate, saving you a lot of money in interest over time. Plus, it could make consolidating all your debts into one loan with a lower interest rate way more affordable than before.
We’ll dive into why now may be a good time to consolidate your debt and what to consider before making your move.
What is debt consolidation?
In its simplest form, debt consolidation is basically combining all your debts into one loan. Instead of juggling multiple bills with different interest rates, due dates and payment structures, you take out one loan to pay them off.
This way, you only have one monthly payment to worry about, and ideally, it’s at a lower interest rate than what you were paying before. Your debt becomes much less stressful to manage, and it can save you tons of money in interest in the long run — if you land the right interest rate on a debt consolidation loan.
How Fed rate cuts affect personal loan rates
When the Fed cuts rates, all borrowing products like mortgages and personal loans get cheaper. Here’s the catch: personal loans typically come with fixed interest rates, so if you already have one, your rate and monthly payments won’t change just because of the Fed rate cut.
New personal loans, however, will likely be offered at a lower interest rate than before. Just keep in mind that rates still vary between lenders, so even with lower rates across the board, it’s still worth shopping around for the best debt consolidation loan.
Why now is a good time to consolidate debt
Here are a few reasons why now is a good time to consider consolidating your debt.
Lower interest rates
Lower rates are by far the most timely reason to consolidate your debt into one loan if you’ve been considering it. Personal loans are already one of the cheaper borrowing options, and with cuts to rates, they could be even more affordable now.
This advantage is especially true if you have high interest credit cards and other loans with higher interest rates that you’ve racked up in the last couple of years. Lower rates mean a cheaper way to pay off all your debt.
Faster debt repayment
Simply put, with lower interest rates, more of your payment will go towards your actual debt instead of interest, which helps reduce your debt faster and pay off what you owe sooner. It also improves your overall finances more quickly.
Fixed rates
Most personal loans come with fixed interest rates. Fixed rates mean your monthly payments will remain the same throughout your loan term. With rates slightly lower, now may be a good time to lock in a lower rate to help you budget more effectively without worrying about future rate hikes — especially if the alternative is balancing multiple high-interest credit cards.
Considerations for debt consolidation
Before you apply for a debt consolidation loan, consider the following:
- Assess current debt. The main benefit of getting a debt consolidation loan is to tackle all your high interest debt with one loan and a lower interest rate. You’ll want to compare rates on your existing debt to rates you receive while shopping for a debt consolidation loan. If you can land a lower rate, it’s a go.
- Check your credit score. While personal loan rates are likely to drop a little, the rates you get are highly dependent on your credit score and financial situation. You’ll want to check and understand your credit score to get an idea of the types of rates you may be eligible for.
- Calculate your potential savings. You can use simple tools and calculators online to help you calculate how much you may save by comparing what you’ll pay in interest on your current debt versus a consolidation loan.
- Watch out for origination fees. You’ll want to factor any costs associated with getting a debt consolidation loan. In some cases, they may come with origination fees. Make sure the costs don’t outweigh any potential savings.
- Keep an eye on repayment terms. Another factor to consider is the term you’ll have with a new loan. Longer repayment terms may mean lower payments, but they generally equate to paying more interest over time.
- Rate shop. If you’ve decided a debt consolidation loan is the right move, you’ll want to compare multiple options to make sure you’re getting the cheapest rate for your situation.
Bottom line
You could see long-term savings, have a single lower monthly payment, pay off your debt quicker and make it easier to manage your debt.
You’ll want to tally up your current interest rates and potential savings and shop around to compare rates, terms and fees before you settle on your best option.
