Getting into debt is easy. Getting out of debt, though, is a lot harder, and the difficulty only increases if you have multiple debts. Between juggling multiple payments and trying to find extra money in your budget to pay down the amounts you owe, you might wish that there was a way to make paying off your debt less stressful.
This is where debt consolidation comes in. Consolidating your debts can save you time and money, and it can even make you feel more confident about your ability to pay off what you owe. The only question is…
What is Debt Consolidation?
Defining Debt Consolidation
Consolidating your debts sounds like a tricky financial move that requires an advanced business degree, but it’s actually not that hard. All you have to do is take out a debt consolidation loan that equals the amount of debt you owe and use that money to pay off your debts. Once you’ve done that, you’ll repay the loan.
You can use a debt consolidation loan to pay off multiple types of debt, including:
- Credit card balances
- Medical bills
- Auto loans
- Home equity loans
- Personal loans
How much can debt consolidation save you?
The Advantages of Debt Consolidation
Debt consolidation has two important advantages over other types of debt management strategies. The first advantage is that consolidating your debt saves you time by condensing all your bill payments into one. You’ll save a lot of time you would otherwise spend on figuring out how much you owe each month and making multiple payments, and you won’t have to worry whether you missed any payments.
Another advantage of a debt consolidation loan is that you’ll probably have a lower interest rate, especially if you consolidate credit card debt. As a result, you’ll end up paying less than you would if you were to pay off all your debts directly. You might even be able to reduce the amount you pay each month by extending the term of your consolidation loan, but remember that extending your loan's term may increase the overall amount you pay.
What Loan Should you use to Consolidate Your Debts?
Once you’ve decided you’d like to take advantage of a debt consolidation loan, the next question is what kind of loan should you get? For many people, the answer will be an unsecured personal loan.
Other people, however, might opt for a secured debt consolidation loan, like a home equity loan or HELOC. These types of loans have a lower interest rate than personal loans do, but this is because the borrower is using their house as collateral for the loan. In other words, if you default on this kind of loan, you’ll forfeit your house, a risk you won’t have with an unsecured loan.
If you have credit card debt exclusively, you might also want to consider using a balance transfer, where you transfer the balance on your credit cards to another credit card. Many credit cards reward balance transfers with a lower introductory interest rate, and some will even charge no interest for a few months, so any payments you make will go directly toward the principal of your debt.
The Limits of Debt Consolidation
Debt consolidation isn’t a universally perfect solution, however. It has some limitations you need to be aware of before applying.
The biggest limitation of a debt consolidation loan is its interest rate. No matter who you select as your lender, you’ll want to avoid a high-interest debt consolidation loan. If the interest on your new loan is higher than the debts you already owe, you’ll end up paying more than you owed in the first place.
You also need to keep in mind that consolidating your debts doesn’t mean your original debt has disappeared. Some people get a debt consolidation loan and then start spending as though they’re debt-free, which only leads to them getting into new debt. Instead, make paying off your debt consolidation loan one of your highest priorities, and avoid taking on new debt until you’ve paid off your loan.
Got questions about debt consolidation? Ask us!
Consolidate Your Debt at First Alliance Credit Union
If you’re trying to figure out how to get debt under control, debt consolidation can be a game-changer. By taking out a loan for the total amount of debt you owe and using it to pay off your creditors, you reduce the number of payments you make to one. Also, if the interest rate on your debt consolidation loan is less than the interest rate on even one of your debts, you’ll end up saving money.
You can also get help managing your debts when you become a member of First Alliance Credit Union. Use the free downloadable debt organizer to keep track of all your debts and create a monthly budget with our budget calculator to figure out how much you can afford to put toward your debts each month. If you’d like to apply for a debt consolidation loan, our lending advisors can guide you through the loan application process and give you valuable advice about whether personal loans or home equity loans are your best debt consolidation option.