When you’re overwhelmed by debt, it’s easy to feel stuck and hopeless. For people with more than one revolving debt, a consolidation loan can be a great way to regain peace of mind and get you back on the right financial track. There are several pros and cons to consolidating debt so this blog will provide you with the information you need to avoid the pitfalls and gain the perks of consolidating debt.
What is a Debt Consolidation Loan?
A debt consolidation loan is a new loan that allows you to combine other loans and revolving debt into one loan. The goal of the new loan should be to have more manageable terms compared to the loans/debts that you are paying off, thus providing you with cost savings.
Types of Loans
There are several different types of debt consolidation loans so it’s important to get the one that works for your situation. These include:
- Secured Loans – This is when you provide a valuable asset to use as collateral (or guarantee) for the loan, in the event of a default.
- Unsecured Loans – There is no asset or property securing the loan so the rate will be slightly higher.
- Fixed-Rate Loans – The loan rate is fixed and not affected by changing market rates. This is often preferred by many borrowers because the monthly payment is predictable.
- Variable Rate Loans – The loan rate can vary during the term of the loan, but it may be lower than a fixed-rate loan.
Should I look at the payment or the rate?
It is important to understand that the actual cost of the loan is not the monthly payment or total amount borrowed, but the interest rate that is applied to it. A lower payment can be very enticing but many times a lower monthly payment is achieved by extending the term of the loan. By taking longer to repay the loan, you’ll increase the overall cost of the loan. When choosing a company to borrow money from, don’t focus only on longer timeframes for repayment. Instead, choose a lender that offers lower interest rates with manageable repayment terms.
Can I get a lower interest rate?
Let’s assume you have six credit cards all with balances and with interest rates ranging between 17.99% and 26.99%, which is the average range for most credit card rates. You always make your payments on time and you have good credit. After shopping around, you see that you can qualify for a personal loan at 7.85%. In this scenario, it makes sense to consolidate your debt because you will have a lower interest rate and ultimately save money.
Have a repayment plan.
In many cases, a debt consolidation loan can help you avoid a desperate financial situation. However, you want to make sure you have the ability and willingness to repay the new loan, as well as, avoid obtaining other new loans and credit cards. Making on-time payments is key to building and maintaining a good credit score. Making one monthly payment on a debt consolidation loan keeps you organized and on track. The best tip to stay on track is to set up automatic payments to your loan, so that you can set it and forget it.
Is it right for you?
Debt consolidation loans can be one of the best tools to pay off your debts and put you back in a strong financial position. However, it’s important to enter these loans with the knowledge you need to make smart financial decisions for your future. At Members Trust, we would be happy to sit down and discuss your particular situation to see if a debt consolidation loan would be beneficial for you.