At Grouplend, we’re geeky in all the right ways. So, when we talk about dry financial things like debt consolidation, we like to do so in ways that are decidedly less boring.
So, we thought – why not try to write an article about debt consolidation using Lord of the Rings metaphors?
For those of us who are carrying around debt, it can seem like an evil overlord. Every month, we have to hand over a large portion of our hard earned money to pay it off, so in a way it feels like we’re debt’s slave and it’s our master.
It’s also incredibly cruel and unforgiving. It doesn’t care if you went out too many times that month for Taco Tuesdays or bought one too many growlers at that great craft brewery that just opened up down the street. It wants what it’s owed every month. And if you don’t pay your debt, it will smite… your credit report.
Almost everyone has to borrow money to do fun, important, or useful things. For example, an auto loan will give you the cash you need to get the wheels you’ve dreamed about since you were 16 years old (i.e. a DeLorean designed to look like a time machine) and a home equity line of credit can help you turn your fixer upper into something worthy of Cribs.
Most people accumulate different types of debt over the course of their lives from credit card debt and student loan debt to mortgages and lines of credit. All these loans generally have wildly different interest rates and might even have high monthly payments. It can also be complicated and time consuming to pay all these individual loans each month.
What is a borrower to do? Simplify!
If paying off your debt seems like it’s going to take as long and be as difficult as a trip to Mount Doom, it might be time for you to consider debt consolidation. In a lot of ways, debt consolidation is like the One Ring that the Dark Lord forged. No, it does not make you invisible and therefore impossible for debt collectors to find – although it would be nice if it did. What it does is rule all the loans… just not through dark power.
Debt consolidation is what happens when you take out one big debt consolidation loan and use it pay off all your other smaller loans. Generally, a debt consolidation loan will have a lower interest rate than the loans that you’re using it to pay off. Because of this, a debt consolidation loan can help you get out of debt faster since you can pay more towards the principal of your loans and less in interest charges each month.
You could also use a debt consolidation loan to reduce your monthly payments. When you refinance with a debt consolidation loan your loan term changes allowing you to potentially make the payments over a longer period of time. Just be sure to add it all up as making your loan term too long could increase the total interest you pay towards your debt over the life of your loan.
Okay, so maybe none of you are as attached to your credit score as Gollum was to the One Ring, but you probably should be. A good credit score can help you save a significant amount of money in interest charges over the course of your life since you’ll be eligible for much lower interest rates. So, does debt consolidation affect it?
If you do your debt consolidation the right way, it can actually improve your credit score. But if you do your debt consolidation the wrong way, it could negatively affect it.
One of the factors that affects your credit score is your credit utilization. If you can help it, you never want to be using more than about 30% of your available credit at any time. By taking out a debt consolidation loan, you’re expanding your available credit – which is a good thing.
For example, let’s say you have a $5,000 line of credit with $2,500 on it and a credit card with a $5,000 limit with $2,500 on it. You will have $10,000 in credit and you’ll be using $5,000 or 50% of it. If you take out a $5,000 debt consolidation loan and use it to pay that other debt off, you will have a total of $15,000 in credit and be using 33% of it. In this situation, by taking out a debt consolidation loan, you will have improved your credit score.
If, however, you decide to close both your credit card and your line of credit after paying them off, you will end up with only $5,000 in credit and a utilization rate of 100% – which isn’t good.
The moral of this story? Don’t close your other credit accounts when you pay them off. That would be as stupid as that one time Pippin knocked the skeleton down the well in Moria and brought the orcs upon them! Amirite?
Because debt consolidation can help you lower your interest rate, it often helps you save a significant amount of money and pay off your debt faster. In other words, if you’re saving more percentage points on interest than hobbits have breakfasts, getting a debt consolidation loan is probably a good idea. Debt consolidation is also helpful if you want to streamline your payments or make lower monthly payments.
But debt consolidation isn’t like Gandalf’s staff – filled with magic and capable of keeping the evil of debt at bay. You’ll still have to be committed to paying off your loan and getting out of debt. If you’re diligent and work hard, you too will be able to toss your debt into the fires of Mount Doom, never to be seen from again.
You might not help defeat an evil army in the process, but being debt-free is pretty good too. If you’re interested in getting an instant quote to help become debt free, get your quote at Grouplend.