All About Debt Consolidation

All About Debt Consolidation

Debt consolidation is the process of moving several (possibly) high-interest debts into a new loan or line of credit. Debt consolidation can help you pay off your debt quicker, with less money going toward interest payments.

Here’s what you need to know about debt consolidation:

What are the benefits of debt consolidation?

1. Saving on interest payments. The primary benefit of debt consolidation is saving on interest costs. Long-term debt with a high interest rate can cost thousands of dollars in interest payments over the life of the loan. That’s money you may not need to pay! Moving that debt to a new loan or line of credit with a lower interest rate, or sometimes no interest rate at all, can translate into significant savings.
2. Simplified payments. With just one monthly payment, managing your debt will be much easier.
3. Fixed payment timeline. Debt consolidation often means having a fixed payment timeline. This makes budgeting easy and allows you to set long-term financial goals with a fixed date for when you will be debt-free.
4. Boost your credit score. If you’ve been falling behind on your monthly payments, moving your multiple debts to a single low-interest loan can help boost your score.

What are the disadvantages of debt consolidation?

1. This may prolong the debt payment timeline. Moving debt to a new loan can sometimes involve extending the loan term. This means the borrower will be in debt for longer.
2. Doesn’t eliminate irresponsible spending habits. If overspending and irresponsible money management is what landed the borrower in debt in the first place, consolidating debt on its own will not solve the problem.
3. The lower interest rate may not last. Many low—or no-interest credit cards only offer these features as a temporary promotion. Once an introductory period ends, the borrower will be hit with high interest rates.

How can I consolidate my debt?

You have several debt consolidation options, each with pros and cons.

Personal Loan

Taking out a personal loan with Elevate Credit Union will enable you to pay off all your outstanding loans immediately and move your debts into one low-interest loan.

Personal loans may have origination fees and other charges. Since they’re unsecured, their interest rates can be high.

Lucky for you, though, as a member of Elevate Credit Union, you have access to some of the lowest rates and fees around.

HELOC or HEL

A home equity line of credit or home equity loan uses your home as collateral for an open line of credit or a fixed-term loan.

The drawback of using your home as collateral to help you pay off debt is that you risk losing your home to foreclosure if you fail to meet your payments. Also, if the value of your home drops, you may end up owing more on your home than what it is worth. Finally, repayment terms for HELOCs and HELs can be upward of 10 years.

As secured debt, interest on HELOCs and HELs will be affordable and may provide you with significant savings. Interest on home equity loan products is often tax-deductible as well.

Balance Transfer

Moving your debt to a new credit card with a low interest rate or a zero-interest offer will allow you to pay off your debts immediately.

The obvious disadvantage of opening a new credit card is that it can cause you to rack up a new credit card bill with your expanded available credit. Also, as mentioned, you may be hit with high interest rates once the introductory period ends. A third downside to going this route is that credit cards have no end date, so you may not achieve that debt-free life anytime soon.

If you’re ready to consolidate your debt, Elevate Credit Union can help! Call, click, or stop by today to discuss your options.

For more financial hacks and education, be sure to check out the rest of our MoneySmart Tips blog.