When you're in trouble paying multiple credit cards and loans, you may explore various options to help you find an easy way out of debt. Interest rate arbitration is one such option. It'll help you obtain lower interest rates on your debt accounts, thereby reducing your monthly outgoings and making it easier for you to manage several bills simultaneously. If you wish to know how interest rate arbitration helps to consolidate your multiple bills at low rates, then check out the topics given below:
What is interest rate arbitration all about?
Interest rate arbitration is the process wherein you take out a secured loan at a low interest rate to pay off your existing unsecured debts. This process basically helps to lower interest rates on your debts. So, if you're finding it difficult to make high payments on your unsecured debts, then interest rate arbitration may be the right option for you.
You can take out a secured loan to eliminate your unsecured debts. As the interest rates on the secured loans are usually lower than that of the unsecured ones, so it helps to cut your monthly payments. Once you take out the secured loan by pledging collateral against it, you can pay off your unsecured debts such as credit cards, store cards, medical bills etc. straightway. Henceforth, you only need to make a single monthly payment on the new loan at a low interest rate, which you can easily afford.
To understand interest arbitration in a better way, let us go through the following example:
Sally has 3 credit cards at different interest rates:
Credit Card A - 15%, Credit Card B - 20%, Credit Card C - 25%
The average interest rate - (15% + 20% + 25%)/3 = 20%
The outstanding balance in Credit Card A= $ 15,000
The outstanding balance in Credit Card B= $ 10,000
The outstanding balance in Credit Card C= $ 5,000
So, the total outstanding balance = $15,000 + $10,000 + $5,000 =$30,000
Sally combines the 3 credit cards into a new secured loan at interest rate = 12%
At the end of the year, Sally lowers her interest rate by = (20% - 12%) = 8%
If the new secured loan amount is also $30,000, then Sally will save = 8% * 30,000 = $2400 every year.
So, if you have multiple credit cards, payday loans, medical bills and you're struggling with the monthly payments, you can go for arbitration wherein you can consolidate and replace several bills into one monthly payment at low interest rate. This is also known as loan consolidation.^Top
Is rate arbitration possible through balance transfer method?
You can arbitrate interest rate through balance transfer method also. In a balance transfer method, you can transfer all your balances from high interest credit cards to a single low rate card after paying a processing fee. Thus, it allows you to lower your interest rates and save money on your unsecured debt.
Some credit card companies charge 0% interest rate on these cards during the introductory period. The introductory period normally lasts for around 6 to 12 months. This means that you don't have to pay any interest rate during this period. You only have to make payments toward the outstanding balance. It is best if you can clear your outstanding balance within the introductory period. This is because the credit card companies can double or triple the interest rates once the introductory period is over.
For example: Emma has 2 credit cards with Capital One and Chase at 15% and 20% interest rates respectively. Emma takes out a 0% interest card from Bank of America and transfers all the balance into it. The BOA pays off the outstanding balances to Capital One and Chase. Thereafter, Emma only has to make payments to BOA.^Top
When should you go for interest rate arbitration?
You may go for interest rate arbitration in the following circumstances:
- You can't afford to pay the high interest rates on your existing unsecured debts
- You are late on your payments
- Your credit score is decreasing
- You want to lower your interest rates
- You want to make a single low monthly payment
- You want to save some dollars for meeting your financial goals
Does interest rate arbitration actually help you?
Interest arbitration can help you in the following ways:
- Helps you lower your interest rates
- Helps you make one easy monthly payment
- Helps to save your hard earned dollars
- Helps to make you stress free
Does interest rate arbitration affect credit?
Usually, interest rate arbitration does not affect credit score in a negative way. Rather it helps you rebuild or improve credit. Your credit score improves gradually as you continue to make the low monthly payments on time.^Top