Is Debt Consolidation the Right Move for You?

Improve Your Financial Situation with Consolidation

Piggy bank floating on a life preserver

Posted on Aug 18, 2020

If like many Americans you have debt, you might wonder if a consolidation loan is the right move for you. As a community bank, we’re here to help you understand your options and find the right solutions.

What is debt consolidation?

Debt consolidation is the process of rolling multiple debts into one loan.

Typically, you can consolidate unsecured debts, which are debts that had no collateral put up at the time of the loan. Unsecured debts include credit card balances, store card balances, medical bills, personal loans, and more. Conversely, car loans, home loans, child support payments, and Federal student loans are typically not eligible.

It’s important to understand that debt consolidation is not debt forgiveness or debt reduction. It is a technique to restructure your debt or make repayment more manageable.

How can debt consolidation help my financial situation?

A debt consolidation loan can help in several ways. It can:

  • Simplify your payments. Instead of making payments to many providers for many loans, you can make one payment to one provider. This is especially useful if you feel overwhelmed with tracking multiple due dates or worry about forgetting a payment.
  • Lower your monthly payments and interest rate. Consolidation loans typically have much lower interest rates than credit cards. Lowering your interest rate can decrease your monthly payments and make room in your budget for other obligations.
  • Create a consistent monthly payment. Consolidation loans are usually fixed rate loans. This means you have a predictable payment every month for the length of your loan. If you currently have variable rate loans, consolidation can help restructure the terms.
  • Diversify your credit mix and potentially improve your credit score. Credit bureaus consider the types of debt you carry when computing your score. Converting credit card debt to an installment frees up the amount of available credit you have, reduces your utilization ratio, and diversifies your credit mix. These factors may improve your scores.

What are my loan options?

The two most common options for debt consolidation are personal loans and home equity loans. Both offer the ability to borrow what you need and repay on a set schedule. However, a home equity loan is only available to eligible homeowners.

  • A personal loan can have a quick approval process, flexible terms, and a lifespan typically ranging from 1 to 84 months. They usually have a fixed rate and are unsecured, meaning you don’t need to provide collateral.
  • A home equity loan uses the value you’ve accumulated in your house to help you pay off debt. Because a home equity loan is secured with your house as collateral, it may offer an even lower interest rate than an unsecured loan.

Your options and specific loan terms depend on your credit score and a number of other factors. It’s important to talk with a specialist or lender about your individual needs.

Where can I get a debt consolidation loan?

There are a lot of companies that offer debt consolidation loans, but you need to be very careful about predatory lending and scams

We recommend you talk to your bank about options, current promotions, and the application process. Working with a reputable institution and one you trust will bring you peace-of-mind during the entire process. Our team would be happy to answer questions and help you start the process.

Is a debt consolidation loan a good option for everyone?

The truth is, it’s not right for everyone.

Make sure you understand the terms of your loan and repayment structure. Depending on fees and the length of the loan, you may end up paying more money over time than you would paying your debts directly. It’s important to weigh the balance of convenience, mindset, and lower monthly obligations with your overall bottom line. Try our online calculator to review your numbers.

It’s also important to think about your money mindset and spending personality. Debt consolidation often fools people into thinking they have less debt than before. Debt consolidation is not debt settlement or forgiveness. Examine any underlying habits and triggers you have that could create an ongoing debt cycle.

Final thoughts and the secret to success

A debt consolidation loan can be a powerful tool to help you get out of debt if you understand it and yourself. To make it work for you:

  • Work with a reputable institution you trust
  • Borrow only what you need
  • Understand the terms of the loan
  • Create a repayment plan
  • Make your monthly payments on time
  • Evaluate your expenses, habits, and triggers
  • Find help from a credit counselor or professional if you need it

Overcoming debt can be a long process, but it’s worth it.

Looking for a loan? We’re here for you.

Our team of local experts is ready to help you with your loan needs. Apply online, over the phone, or at one of our locations.

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