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Is debt consolidation right for you?

Posted in Borrowing Money on February 1, 2019

When you’re up to your eyeballs in debt, the one thing you may wish for is a blank slate. If you had the chance to wipe your slate clean and start over, things would be different. You can get there, but unless you win the lottery, it’s going to take some time.

There is, however, another option you can take for getting your debt under control. You can use a personal loan to refinance your existing debt. That means you’ll have one monthly payment at one interest rate instead of the stress that a number of small bills coming due on different days of the month at different (and often higher) interest rates. But this solution only works if you’re dedicated to paying off the debt.

Here are some questions you might ask yourself before you take on a debt consolidation loan.

1. Have I fixed the debt problem? Consider why you’re in debt. For some people, it might be an unexpected medical bill, or the loss of a job, or some other temporary hardship that couldn’t be paid off right away.

If on the other hand you accumulated debt by overspending on credit cards, a debt such as creating a budget and sticking to it while learning to save and using credit in a responsible manner. Getting a debt consolidation loan without doing those things first is only a temporary solution that might actually make matter worse in the long run. 

2. Can I commit to a repayment plan? If you’re struggling to make minimum payments on bills, a debt consolidation loan can only do so much. While the lower interest rate may make repayment easier, it’s possible that bundling all of the debt together could result in a higher monthly payment over a shorter period of time. Figure out how much you can afford to put toward getting out of debt. If you’re relying on a fluctuating stream of income to repay debt, like a second job or financial windfalls, it may be difficult to commit to a strict repayment plan that’s as aggressive as you would like. What you can afford to pay on a monthly basis may be no more than what you’re already paying. With a personal loan, you can use the extra income to make additional principal payments, which will still help in the long run.

3. Is my interest rate the problem? For some people, the biggest chunk of their debt is a student loan. These loans receive fairly generous terms, since a college degree should generally result in a high-paying job. Debt consolidation for student loans, especially subsidized PLUS loans, may not make sense. You’re better off negotiating the repayment structure with your lender if the monthly payments are unrealistic.

On the other hand, if you’re dealing with credit card debt, interest rate is definitely part of the problem. Credit card debt interest can run as high as 20 percent and greater, more than twice the average rate of personal loans. Refinancing this debt with a personal loan can save you plenty over racking up interest making only minimum payments.

4. Will a personal loan cover all my debts? The average American household has nearly $15,000 in credit card debt, and when you add other debt, such as auto loans, it’s no wonder why debt is such a problem for most households.

The caution with personal loans for debt consolidation is to make sure you can bundle all of that debt together. If you have more than $50,000 in credit card debt, it’s going to be difficult to put together a personal loan that can finance the entire amount. Instead, it might be worth prioritizing the highest interest rate cards and consolidating those instead of trying to divide your refinancing evenly between accounts.

Debt consolidation doesn’t work for everyone, but it can help many. Eliminating high-interest debt and simplifying monthly expenses into one payment for debt servicing can change a family’s financial picture. The only way to know if a personal loan to consolidate debt is right for you is to sit down with a loan officer and review your unique situation. So if you need help, gather your account statements and your pay stubs and head to CDC Federal Credit Union.

Have you had success paying off debt? How did you do it? Share your experience in the comment section of this blog post.

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