Consolidating your debts, could be the same as saving?

May 01, 2015
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If you’re short on your budget, perhaps consolidating your debts is a way to save. Find out here if is the right choice for you.

Lowering the amount you pay monthly to reduce your debt is easier than you think. There are services in which we can make some adjustment to pay less (water, electricity, telephone, etc.). However, there are other payments such as stores credit card payments, and other debts in which you can do something to lower the amount you pay each month.

Evaluating your debts is a good step to start reducing your payments. For example, if paying the minimum amount on your credit cards is your thing, you probably are not checking how much the balance you owe amount is decreasing, to estimate whether paying a little more is most convenient thing to do.

We recommend consolidating your debts, and you might discover a new financial opportunity for your benefit. A personal loan could help you reduce the amount of creditors. By paying one interest financing, you can save the interests of other creditors. At the end, you could have one monthly payment depending on the loan amount and reduce the time you would take to pay all your debts amount consolidated.

To see if this is an option for you, you should observe your finances carefully. Kurt A. Schindler, director of Financial Education in Banco Popular recommends that you establish first what your goal; in this case, shorten the debt or reduce the monthly payment. To accomplish this, he suggests following these steps:

Step 1: Know the debt you have with each creditor. The information can be found in the monthly statements or the contract you signed when you were granted a loan. If you do not have them on hand, calls each commerce, bank and cooperative with which you have debts you want to consolidate.

Step 2: Check the interest rate you have with each creditor.

Step 3: Calculate the due date of each debt.

Step 4: Collect all debts, so you have the actual balance in black and white.

Step 5: Evaluate Popular offers on loans to consolidate the total balance of your debts. Ask for the average interest rate and the number of years if you make the minimum payment. So you know whether the transaction benefits you.

The following is an example to show you how this exercise works:

A young man wants to consolidate three debts: a personal loan and two credit cards.

 Example graphic:

Debts

Owed amount Monthly payment Interest rate Remaining time to pay off debt

Personal Loan

$ 11,550.00

$ 350.83

10.50%

39 meses

Credit Card

$ 8, 447.03

$ 169.00

16.99%

87 meses

Store Credit Card

$ 492.71

   $ 25.00

  24.55%

25 meses

Total Debt $ 20,489.74 $ 544.83

The interest of a new loan to consolidate depends on the score and credit history of the young man. If he consolidates his debts with a loan of $20,500.00, to seven years with an interest rate of 7.49% APR (Annual Percentage Rate), he will pay $314.33 per month. If the loan is approved with a 13.50% APR, his monthly payment would be $ 378.53 for the same term of years. The young man will have a minimum savings of $166.30 ($544.83 paid at the present time – $ 378.53 that he would pay with the loan at  13.50% APR). This will allow him to have more money. Everything depends on the interest, because the higher it is, the less he will have available to save.

The exercise also demonstrates that the consolidation loan will shorten the payment of any credit cards or extend, depending on the time remaining to pay off each card. For example, according to the table, if you make only the minimum payments on credit card bank, he will settle his debt in about 87 months; whereas with the consolidation loan that time is reduced to 84 months (7 years). However, if the young man make adjustments, it could very well pay off his store card in a few months, without having to include it in the consolidation loan whose interest could become greater than the rate on his actual personal loan.

The important thing is to make the exercise with each of your accounts and discover what really is your financial picture. A loan to consolidate it might help to have a lower monthly payment and even shorten amount of time to pay off debt. The important thing is that you use the money you save for what you need or to invest in anything you like and not to re-commit it to other debts that will not allow you to stay afloat.

View popular.com/en/loans where you will find information that will allow you to compare different types of loans and its benefits, knowing the base of each loan rate, the amount to be financed and even calculate the payment. You can apply for your loan at popular.com/en/loans/personal-loans/unsecured; You can also call TelePréstamo Popular® at 787.724.3653 or 1.888.724.3653 or visit some of our 168 branches around the island. All applications are subject to credit approval.

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