Everyone is at a different stage in their financial journey, including how much debt they may have. So, could debt consolidation be right for you? This option may make paying your debt more manageable and assessing the pros and cons of debt consolidation loans is important before jumping right in.
What is Debt Consolidation & How Does It Work?
Debt consolidation is a way for you to merge your debts by taking out a new loan or credit card. You use that new credit card or loan to pay off your debts, leaving you with a single monthly payment. This debt consolidation strategy could benefit you if you have trouble managing multiple payments or have multiple high-interest loans or credit cards. Many choose debt consolidation because of the potential for a lower interest rate and monthly payment.
How to Consolidate Debt
There are various ways you can consolidate your debt. Learn more about the three most common options for debt consolidation below.
Credit Card Balance Transfer
Credit consolidation could be a good choice if a new card offers a lower interest rate than your current credit cards. When you consolidate with a credit card, you can transfer your existing credit card balances to one credit card. This streamlines your credit card balances into a single payment.
Debt Consolidation Loan
What is a debt consolidation loan? A debt consolidation loan is a personal loan used to pay off individual debts. When you pay those debts off with the new loan, you are left with the one loan payment over a set term. You can use different types of det consolidation loans, like a personal secure or unsecured loan for debt consolidation.
Home Equity Loan or Home Equity Line of Credit (HELOC)
If you are a homeowner with equity in your home, a home equity loan or home equity line of credit may be able to help consolidate your debt. This option for consolidating debt is very similar to obtaining a debt consolidation loan. And, since your home secures this type of loan, interest rates on home equity loans are often lower than credit card rates.
Is Debt Consolidation a Good Idea?
Debt consolidation may be a good idea if your monthly cash flow is sufficient to cover your debt payments or if your credit score has improved since you took out the original loans or credit cards.
You may want to avoid debt consolidation if you won’t be able to fund the monthly debt consolidation payment or if you could pay off your current debt obligations in less than one year. Debt consolidation is not a quick fix for financially bad habits. Having a long-term debt management plan is a great first step before looking into debt consolidation.
For many people, debt consolidation plans offer the opportunity to better manage debt, and they may be the right move for you depending on your financial goals and situation. To know if debt consolidation is right for you, it is recommended that you consider the advantages and disadvantages that may impact you.
Benefits of Consolidating Debts
- Consolidation results in one payment, making debt easier to manage.
- When you consolidate, there is the potential to obtain a lower interest rate on your debt.
- You also have the potential for lower monthly payments when you consolidate loans and debt.
Risks of Debt Consolidation
- A lower interest rate is not guaranteed, especially for borrowers with weaker credit scores.
- You may have to pledge your home as collateral if using a home equity loan to consolidate. This means that if you were to default, you could lose your home.
- The term of the consolidation loan may be longer than the debts you consolidated, meaning you could end up paying more than your original debt.
- You may have to pay balance transfer, loan origination or closing fees.
For many people, debt consolidation offers the opportunity to better manage debt and it may be the right move for you depending on your financial goals and situation. If you are interested in learning more about debt consolidation, visit the free Centris Financial Wellness Center! Click “Choose Your Course Now” and select the “Building Financial Resilience” module to learn more about debt consolidation.
If you’re looking for expert advice about debt consolidation, look no further than the Centris Federal Credit Union team. Visit a local branch, give us a call at (402) 334-7000 or (800) 334-7000 or make an appointment online to meet with a representative today!
Federally Insured by NCUA. Equal Housing Lender.
