Debt Consolidation-Is it For You?

You may have found yourself thinking about your finances more often lately, including changing your spending habits and reducing debt balances. When you’re on a tight budget, every dollar counts. Maybe you’ve been diligently paying on your debt, but it seems like it’s taking a long time to reduce the balances.

If this sounds like you, a debt consolidation loan may help you take control.

Debt consolidation is the combining of existing debts into a single loan with one payment. For example, refinancing your home loan, and using the existing equity to pay off a vehicle, credit card or medical debt. Many people are surprised to learn that consolidating credit cards and other personal debt into a new loan can significantly lower their monthly payment, reduce the amount of interest they pay or, in some cases, both.

Make an appointment

So, is this the right financial strategy for you? Here are four questions to ask yourself when considering a debt consolidation loan:

1. Are you consolidating revolving credit cards to a fixed-term loan? Once you consolidate multiple credit card debts into one loan, those credit cards now have a zero balance. Think carefully about whether you have the budget and financial discipline to keep those balances under control. For some, easy access to a line of credit is too tempting and soon they’re back in debt. This can become a repetitious cycle that does nothing but get you further away from achieving your dreams. However, for those who are confident they can curb their spending, consolidating credit card debt to a fixed-term loan may be a good idea.

2. Will you save money on your monthly payments or in overall interest? If the answer to both is no, then spending the time and money to refinance may actually cost you more. The same goes for whether you could realistically pay off your debt in six months to a year—if so, it probably doesn’t make sense to consolidate.

Depending on a variety of factors, you may be in a position to lower your monthly payment or pay off the debt sooner. Look at how much you pay each month and whether you might be able to pay extra toward the loan. Talk with your financial institution to get accurate information before making a decision. If you want to explore your options, use a debt consolidation calculator to test out several scenarios.

3. Are you only making the minimum payment on your credit cards? If so, you may be paying a very high interest rate on the balance. This usually makes it much more difficult to quickly pay off the debt. If you’re having difficulty paying more than the minimum payment, this may also be a good time to consider a debt consolidation loan with a lower interest rate.

4. Do you have available collateral for the loan? Consolidating a mortgage refinance, home equity or car loan will likely give you a far lower rate than consolidating unsecured debt like credit cards. Keep in mind, however, if you use your home or car as collateral, there is additional risk if you default on the loan. Also consider that, while you may be lowering your monthly payment, you may also be spreading your debt over a much longer period of time, particularly with a home equity line of credit (HELOC) or mortgage loan.

If you've done any research on debt consolidation, you may have come across something called a blended interest rate. This is a calculation that could help you save money on your new loan. But it doesn't work in every situation. Contact Mountain America Credit Union to review your debt and see if this is a good option for you.

Mountain America’s free debt rescue tool can help you consolidate debt or refinance your loans at a lower rate. A free debt analysis takes just a few minutes, but it could save you hundreds—or even thousands—of dollars in interest and reduce the total number of payments. Give us a call, drop by a branch, or schedule an appointment online today.

Loans on approved credit.Make an appointment