For better or worse, debt happens. However, when debt becomes overwhelming, it may be time to consider debt consolidation. I'm sure you've turned on the television, or surfed the web, and seen countless ads for debt consolidation loans from hundreds of lenders. Debt consolidation can give you piece of mind and get you back on the right financial track.
A Lower Interest Rate
Let's assume you have six credit cards all with balances and with interest rates ranging between 17.99% and 26.99%, which is the average range for most credit card rates. You always make your payments on time and you have good credit. After shopping around, you see that you can qualify for a personal loan at 6%. In this scenario it makes sense to consolidate your debt because you will have a lower interest rate.
Another key benefit is that your loan will have a term. Typically these types of loans have a 3 - 5 year term, which means by making one loan payment monthly, you will have paid off all of your debt in a few years, as opposed to just making the minimum payment on your credit cards. Making the minimum payment on your credit cards will add more to interest, and less to principal, and will take far longer to pay off.
A Fixed Interest Rate
In some cases, it makes sense to switch from a variable rate loan to a fixed rate loan. Variable rates change with the market, so when interest rates rise, your rates go up as well. Fixed rates don't change, regardless of what the market does.
Many credit cards are variable rate cards, so it would make sense if you have a larger amount of debt to consolidate. If you have small, manageable debt that you believe you can pay off in 6 months to a year, it may make more sense to continue to make the payments, as opposed to consolidating.
Making on-time payments is key to building and maintaining a good credit score. Making one monthly payment on a debt consolidation loan keeps you organized and on track. The best tip to stay on track is to set up automatic payments to your loan, set it and forget it.
It's All Up to You
Consolidating debt can provide some serious relief. However, it is up to you to make sure that you don't continue to use the credit cards that got you here in the first place. If you decide to consolidate, make sure you have a plan to pay the loan off, and you avoid using the same cards to get you back in the same position in a year or two. If you don't think that you can control yourself, close the cards. If you believe that you can, keep the cards open to continue to build your credit history. Starting a budget is also a great way to keep yourself on track after debt consolidation.
Types of Loans Available for Debt Consolidation:
Generally, you do not need a debt consolidation company to help you pay off debt, most financial institutions can help you with this. The most common types of loans for debt consolidation are:
- Personal Loans: An unsecured loan, with a fixed rate and terms generally ranging from 1 to 5 years.
- Low Interest Rate Credit Cards: If you can qualify for a credit card, with a 0% interest rate for 12 months or more, it may make sense to transfer all of your balances to that one card, especially if you have $5,000 or less in credit card debt.
- Home Equity Loan or HELOC: If you have enough equity it your home, it may make sense to combine all of your debt using this one loan.
Watch First Alliance Credit Union President and CEO Mike Rosek give more advice about debt consolidation on KIMT!
Consolidate Your Debt With First Alliance Credit Union
The keys to debt consolidation are:
- Commit to paying off the debt in a specific amount of time.
- Once you've consolidated, commit to avoiding the behaviors that got you there, consider starting a budget.
- Talk to your lender and discuss the loan options that work best for you and your situation
Paying off your debt can be a fantastically good money move. Contact First Alliance today and let our loan advisors help you figure out if debt consolidation is right for you.