If you are part of the 42% of people who believe paying off debt is your top priority¹, you may have considered a debt consolidation loan. When you are on a tight budget, every dollar counts.
One piece of advice I always pass along about debt consolidation is that it is not a one-size-fits-all budget fixer. Take the time to talk with a financial advisor or loan officer to make sure this is the best fit for you.
Ask these four questions when considering a debt consolidation loan:
- 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. For those who are confident they can curb their spending, consolidating credit card debt to a fixed-term loan may be a good idea.
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 without making this move—if so, it probably doesn’t make sense to consolidate.
Depending on a variety of factors, you may be able to lower your monthly payment or pay off the debt sooner. If you want to explore your options, use a debt consolidation calculator to test out several scenarios.
- 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.
- 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.
Mountain America Credit Union’s free debt rescue tool can help you consolidate debt or refinance your loans at a lower rate. A free value 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.
¹2022 Cleo Money Trend Report