Paying off debt can be challenging. Between credit card debt, student loan payments, car repairs, medical bills, whatever makes up your debt, it can be hard to keep up. If you’re feeling overwhelmed with debt, you may want to consider debt consolidation.
Debt consolidation is a way to combine multiple debts, whether they are credit card bills or loan payments, into one single payment. This means you’ll have one interest rate and one payment to focus on, which may help you pay off your debt faster.
There are several ways to consolidate debt. These are the most common.
Personal Loan
A personal loan be used for pretty much anything, including debt consolidation. They typically have lower interest rates than the big credit card companies’ cards, but you need a relatively good credit to qualify for the lowest rate. This option is a quick and easy way to simplify your payments.
Home Equity Loan
If you’re a homeowner, taking out a home equity loan or line of credit can be a great option for consolidating debt. If you’ve paid off a significant portion of your mortgage, you can borrow against that equity to consolidate. This option can be a little risky because you’re offering your home as collateral, which can put you in danger of a foreclosure if you miss payments.
Balance Transfer
If you have multiple credit card debts, a balance transfer credit card can help you pay down your debt and minimize your interest rate. LCU offers free balance transfers on new VISA cards. Consider transferring your balances to an LCU VISA card.
Debt consolidation has both benefits and drawbacks to consider before deciding if it’s the right financial strategy for you. Let’s talk about reasons it may be beneficial.
You can’t keep up with monthly payments
Tracking all your due dates can get confusing. With debt consolidation, you can save stress and avoid late fees by only having one monthly payment to remember.
You have a solid plan to improve your finances
Before you make the decision to consolidate, evaluate your spending habits and come up with a plan to avoid running up more debt. Debt consolidation may make it easier to plan and stick to a budget.
Your credit score is high enough to qualify for a lower interest rate
If your credit score has improved since taking out your other loans, you’ll have a better chance of qualifying for a lower rate than what you currently have. This can help you save interest over the life of the loan.
Your cash flow consistently covers payments toward your debt
You want to make sure you have enough monthly income to cover your new monthly payment. If you can comfortably cover the new payment, consolidating may be a great option for you.
Debt consolidation is a great financial strategy, but you want to make sure it makes sense for your current situation before making a decision. We’ve detailed a few common reasons you might not want to consolidate.
You have a small amount of debt that could be repaid quicky.
If you think you can pay off your debt in less than six months, debt consolidation may not be worth the hassle.
You can’t change your spending habits right now.
If you transfer debt, and then rack up more debt, you could end up in an even worse financial situation. It’s best to buckle down on your spending habits before moving forward.
You have a poor credit score
If your credit score is low, you should focus on making on-time payments and increasing your score. Reevaluate in six months and consider a debt consolidation then.
If you’re struggling to manage multiple debt payments and ready to improve your spending habits, debt consolidation may be worth considering. It’s important to keep in mind that debt consolidation does not lower how much debt you owe. It moves your debt from one place to another, ideally under more favorable terms. As you consider your consolidation options, ask yourself these questions:
If you’re still unsure whether or not debt consolidation is right for you, contact us! We have experts available to review your financial situation and advise on the best next steps.