Debt Consolidation Rates

Debt Consolidation Rates

One of the most important elements of successfully emerging from a debt situation is to know all about debt consolidation rates. In fact, when it comes to financial planning and debt management, there probably isn’t a more important series of numbers to know than debt consolidation rates.

Debt consolidation rates are the interest rates pegged to various types of consolidation loans. Different loans will generate different debt consolidation rates. Factors for determining debt consolidation rates include a borrower’s credit history and present economic/cash flow situation, market forces, prime lending rates, and other variables.

Yet the above doesn’t clarify precisely why knowing debt consolidation rates are so vitally important to those who are consolidating their debt. Basically, debt consolidation rates play a massive role in helping borrowers understand how much money they’ll save through a debt consolidation loan, and just as important, how quickly they’ll emerge from debt in the long run.

For example, let’s say a borrower takes out a home equity consolidation loan. These types of loans are usually offer competitive debt consolidation rates, because the collateral (the home) is something most lenders feel is secure and safe. Let’s say that the loan is for $10,000, and pegged at 10% per year. This means that, over the year, if no principal is paid, then $700 will be owed on the loan in interest.

Yet what if debt consolidation rates were to plummet to 5%; perhaps because the government lowered its prime lending rate or the economy was in a recession and the government wanted to instigate some major spending? That same home equity loan, were it renegotiated under the new debt consolidation rates, would demand only $500 in interest per year; that means that $200 that was being spent on interest under the old debt consolidation rates could be put towards the principal of the new (5%) loan.

In essence, thanks to the new debt consolidation rates, the loan is paid off quicker - $200 more dollars are applied to the principal each year.

This is just a simple example, and using the above situation and debt consolidation rates, a borrower would pay off their $10,000 debt in 50 years; something that no lender would tolerate. Yet this is just an example of how changes in debt consolidation rates can, and do, influence a borrower’s ability to save money and emerge more quickly - or more slowly - from a debt obligation.

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