Lower Rates Can Reduce Your Current Debt

As consumers, when we hear that interest rates are historically low, we’re somehow conditioned to think about spending money we don’t have. That’s not always a bad thing, especially if you truly need a house or a car. But lower rates aren’t just for new debt. They can also help make your current debt cheaper.

When you refinance your auto loan at a lower rate, you can lower your monthly payments, which also adds wiggle room to your monthly budget. Another option is to continue making your same payment on a lower interest loan and possibly pay off your loan earlier than anticipated. That saves you money down the road.

What about credit card debt? Is the interest rate on your credit cards higher than 10 percent? Consolidating all of your cards into one low interest loan can save hundreds or even thousands of dollars in interest payments and help you pay off those cards so much faster.

Let’s put this in perspective. If you have $10,000 in credit card debt with an interest rate of 18.99% APR, and you’re making the minimum monthly payment of $200, it will take you 100 months – more than 8 years – to pay off that debt. You’ll also pay almost $10,000 in interest before the loan is paid off.

If you take that $10,000 debt and put it into a low interest loan like a home equity loan, with an interest rate of 5.99% APR, you can pay off that debt in 5 years with a monthly payment of about $193. If you pay an extra $100 a month, you can pay off the loan in about 3 years and save yourself the thousands of dollars in interest you’d be paying over 8 years on those credit cards.

Everyone’s financial situation is different. Some people would rather increase their monthly payments and get the debt paid off faster. Others just need to make more room in their monthly budgets. Both are usually possible when you can take your current debt and refinance it into some form of lower interest loan.