Debt Free Consolidation

Debt Free Consolidation

The elusive dream of living debt free has become much more realistic thanks to debt free consolidation. Debt free consolidation involves obtaining a loan (of any kind) and using it to pay off existing debt. The result is that, just like that, a great deal of debt is wiped out.

Yes, of course, there is still the debt free consolidation loan itself to pay off. Yet even though one form of debt has been paid, and a new form of debt has replaced it, this doesn’t mean that the borrower has taken one step forward and one step back. On the contrary, the debt free consolidation decision has replaced higher interest rate demanding loans, such as unsecured credit card debt, and replaced it with a lower interest rate demanding debt free consolidation loan. The result? A means to pay off debt faster, and move forward closer and closer towards that debt free dream.

Here’s an example that more clearly illustrates how debt free consolidation works. Let’s assume that you have $3,000 in credit card debt, and the interest rate for this card is pegged at a rather punishing 20%. That means that, over a year, the interest owed on the credit card will be something in the neighborhood of $600, or $50 a month - and that’s just interest! The principal will remain the same.

Now let’s say that because you’ve chosen a debt free consolidation option that you take out a $3,000 home equity loan at 7%, and use it to pay the credit card. Now, if you took that $50 you were spending to service the credit card debt, you’re going to pay both interest and principal. In fact, if you paid $50 a month towards this loan, at the end of one year, the principal would be down to about $2,500!

So what happened? Nothing! Well, nothing as far as you’re concerned; the debt free consolidation loan merely replaced a higher interest rate with a lower one. Your monthly payments remain the same, but you’re 20% closer to being debt free after one year than you were before! And all because of wisely choosing debt free consolidation as a way to win the interest rate game.

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