If you have a lot of debt, you're not alone. More and more Americans are burdened with credit card and loan payments. Whether you are trying to improve your money management, make ends meet, lower your monthly loan payments, or keep up with your bills, debt consolidation from Patelco may help.
What is debt consolidation?
Debt consolidation is when you combine all of your smaller individual loans and credit card balances into one larger loan, usually at a lower interest rate. Typically, you will end up saving money in interest and/or free up cash each month because of a more affordable payment.
How to consolidate debt?
There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with the basic debt information (the lender or bank, account number, and approximate balance). Or, your credit card company may send you “convenience checks” that you can use to pay off your old balances; the amount of the checks is then added to your credit card balance. Keep in mind, however, that there is usually a fee for this type of transaction, and any promotional, lower rate may last for only a certain period of time (such as six months).
Some lenders offer loans specifically designed for debt consolidation. You'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Sometimes, these loans may require collateral on the loan (for example, your car or bank account). Check with the lender to see if it’s a secured (requiring collateral) or unsecured debt consolidation loan.
Another option is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans, which require an application and an appraisal of your property to determine the amount of your equity. Typically, you can borrow an amount equal to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders. Learn more about home equity loans and HELOCs for debt consolidation.
What are the advantages and disadvantages of debt consolidation?
Patelco is not a tax advisor, and the information provided here is for informational purposes. Before making any financial decisions that could trigger tax implications, we suggest you talk to your tax advisor.
Some potential advantages of debt consolidation:
- The monthly payment on a consolidation loan is usually lower than the combined payments of your existing, smaller loans.
- Consolidation loans usually offer lower interest rates.
- Consolidation makes bill paying easier since you have only one monthly payment, instead of many.
Some potential disadvantages of debt consolidation:
- If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won't actually be saving any money over time, even though your monthly payments will be less.
- If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.
- If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the loan.
Should you consolidate your debts?
For debt consolidation to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. Use our debt consolidation calculator to do the math. If this isn't the case, consolidation may not be your best option. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans. This allows you not only to save money but also to lower your monthly payment.
Not sure what to do? Talk to one of our Certified Financial Specialists — they’re here to offer no cost, unbiased advice to help you make the best decision for your situation.
Source(s) consulted: Broadridge Financial Solutions.