Q: I'm up to my ears in debt, and I'd love a way out. I'm strongly considering debt consolidation. What do I need to know before I move ahead?
A: 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 overall interest payments.
Here's what you need to know about debt consolidation:
What are the benefits of debt consolidation?
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.
Simplified payments. With just one monthly payment to make, managing your debt will be a lot easier.
Fixed payment timeline. Debt consolidation often means having a fixed payment timeline. This makes budgeting easy and allows you to make long-term financial goals with a fixed date when you will be debt-free.
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 to boost your score.
What are the disadvantages of debt consolidation?
May prolong the payment timeline of the debt. Moving debt to a new loan can sometimes involve extending the loan term. This means the borrower will be in debt for longer.
Doesn't eliminate irresponsible spending habits. If overspending and irresponsible money management are what landed the borrower in debt in the first place, consolidating debt on its own will not solve the problem.
A lower interest rate may not last. Many low- or no-interest credit cards only offer these features 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 options for debt consolidation, each with its pros and cons.
1. Personal loan. Taking out a personal loan from Members Choice CU will enable you to immediately pay off all your outstanding loans and move your debts into one low-interest loan.
Personal loans may have origination fees and other charges. Also, since they're unsecured, these loans' interest rates can be high.
Lucky for you, though, as a member of Members Choice CU, you have access to personal loans with no origination fees and interest rates as low as 10.24% APR*.
2. 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 your home's value 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 in home equity loan products is often tax-deductible as well.
3. Balance transfer. Moving your debt to a new credit card with a low-interest rate or a zero-interest offer will make it possible for you to immediately pay off your debts.
The obvious disadvantage with 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, which means you may not achieve that debt-free life anytime soon.
Fortunately, as a member of Members Choice CU, you can take advantage of our 0%** APR* balance transfer credit cards to help you get rid of your debt quicker.
If you're ready to consolidate your debt, we can help! Call, click or stop by Members Choice CU today to discuss your options.
* APR = Annual Percentage Rate and rates are effective as of 2/19/21 and subject to change without notice. Credit union rates are based on creditworthiness, so your rate and loan amount may differ. The rate displayed is the lowest rate available, with an autopay deduction rate.
**The 0% Annual Percentage Rate is a "discounted" rate for the first six consecutive billing cycles of the balance transfer. The rate reverts to the regular rate, currently 6.99-9.99%. Must meet credit requirements. Restrictions apply. See MCCU for full disclosure.
Members Choice Credit Union