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December 13, 2023

What is Debt Consolidation & How Does it Work? | BHG Financial

Reasons to consider taking a loan to pay for a vacation

Debt is a fact of life for just about all Americans. Credit cards, personal loans, and other types of financing are common tools for covering expenses—until monthly payments start to become a burden on budgets.

And, according to a recent study by TransUnion, personal credit balances are at record highs. Consumers, on average, owe $5,733 on their credit cards and $11,281 on their unsecured personal loans.*

The average consumer owes:

Consumers across the country are facing a shared challenge: paying off their debt and finding the most effective way to do so.

In this article, we’re going to explore some key considerations when paying down debt as well as the benefits of consolidating your debt into a single financial solution with favorable terms.

Choosing a debt repayment strategy

Deciding on an approach to repay debt can be challenging, especially for consumers who carry multiple tradelines. With various debts to pay off, one would need to choose which accounts to pay down first.

According to basic financial principles, consumers should pay off the debt with the highest interest rate most quickly. This would help them avoid additional interest expenses down the line.

However, debt management research utilizing the Goal Gradient Hypothesis indicates that consumers may be more motivated to focus on proximal goals or “low lifts.”** So, they are likely more inclined to pay off debts with lower balances rather than prioritize larger debts with high rates.

Think of it like this.
 

When you’re just starting your workday and reviewing your to-do list, what are you more tempted to complete first?

A. A quick email you need to send to a colleague

B. A 30-minute company training course

C. A comprehensive quarterly report that’s not due until the end of next week

 
The simpler the task, the more likely we are to prioritize it.

For many of us, we’re most likely completing this hypothetical to-do list in alphabetical order, starting with the simplest option (quick email) and moving our way toward the most complex (quarterly report)—even if the latter may be of greater importance. And the same methodology applies to debt repayment.

So, what can you do as a consumer to establish an effective repayment strategy that allows you to see tangible progress each month?

By consolidating personal debt, you reduce the total number of outstanding tradelines and get the opportunity to focus on a single monthly payment—thereby increasing your motivation and carving a clear path toward repayment.

How personal debt consolidation works: An illustrated example

If your personal debt is starting to weigh you down, personal debt consolidation is a simple and effective way to manage your finances.

Essentially, you can pay off all or part of your existing debt with a new financial solution that offers better terms, namely one fixed interest rate, one monthly payment, and a longer repayment period, if preferred.

Here’s how it works.

Financing Details

In this scenario, if you continued to make payments on your existing debt, you would need to pay $2,859 a month for 3 years to bring the balance down to zero. Also, you would pay $27,938 in interest during that time.

A personal debt consolidation loan for the same principal amount ($75,000) and the same repayment term (3 years), with a fixed interest rate of 17%, can help you save $6,382 on interest over the course of the loan.

If your immediate focus is on the affordability of your monthly payments, you may choose to extend your repayment period. In the same example, consolidating your debt into a 10-year loan will decrease your monthly payment from $2,859 to $1,314.

That’s 54% more affordable than your previous financing.

Note: Extending your repayment term will result in you owing a higher amount of total interest over the life of the loan.

What is the benefit of consolidating your personal debt with an extended-term loan?

Lower monthly payments are primary benefits of an extended-term personal debt consolidation loan. These affordable payments make it so that you can keep more cash on hand.

Additionally, personal debt consolidation streamlines your finances. If your current debt consists of multiple credit cards, loans, and other lines of credit, debt consolidation gives you one loan with a fixed interest rate, due date, and low monthly payment—so that you can spend less time managing debt and more time focusing on other priorities.

What are the advantages of consolidating your personal debt with BHG Financial?

With so many options available, we understand how challenging it can be to choose the right lender for your financing needs.

BHG Financial is widely regarded as a top choice for our large loan amounts up to $200,0001 and long repayment terms up to 10 years1,2, providing our customers with low monthly payments. Beyond large amounts and flexible terms, you can take advantage of a streamlined lending experience with minimal paperwork and no personal collateral required.

You can get started online today by viewing your monthly payment estimate here. Checking won’t impact your credit score.3

 

Personal loans not currently available in Illinois or Maryland.

1 Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.

2 Personal Loan Repayment Example: A $59,755 personal loan with a 7-year term and an APR of 17.2% would require 84 monthly payments of $1,229.

3 There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

No application fees, commitment, or impact on personal credit to estimate your payment.

Consumer loans funded by one or more participating lenders. Equal Housing Lenders. Equal Housing Lender

For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493.

 

* “Credit Card and Unsecured Personal Loan Balances Remain at or Near-Record Levels as Consumers Navigate Challenging Economic Climate.” TransUnion. https://newsroom.transunion.com/q1-2023-ciir. Accessed September 13, 2023.

** Amar, Moty; Ariely, Dan; Ayal, Shahar; Cryder, Cynthia; Rick, Scott. “Winning the Battle But Losing the War: The Psychology of Debt Management.” Journal of Marketing Research. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1760528. Accessed September 13, 2023.