Jan 16, 2019 / Money Tips
It’s the beginning of a new year and your list of resolutions is still fresh in your mind. If you resolved to resolve your debt this year, debt consolidation might be the perfect way to give you a head start. Here are a few questions to help you better understand debt consolidation.
Debt consolidation means taking out a new loan to pay off multiple existing loans. Often, by combining multiple debts into one loan, you can find a better interest rate and get a lower monthly payment. Plus, reducing the number of debts you have to pay every month is a much more manageable and convenient way to pay off your loans.
There are multiple ways to consolidate debt. One option is to find a credit card with a low fixed interest rate and transfer the balances of multiple existing credit cards onto your new card. This is called a balance transfer. Sometimes banks and credit unions offer incentives for balance transfers, including giving cash back on a percentage of the amount transferred. Other ways to consolidate debt include opening a home equity line of credit (HELOC), a home equity loan, or a personal loan to pay off multiple debts.
When considering different debt consolidation options, you should be aware of the difference between a secured and unsecured loan. Secured loans are backed by some type of collateral. In the case of a HELOC or home equity loan, that collateral is your home. One advantage of secured loans is that they are less risky for the lender. And the lender can pass some savings to you in the form of a low interest rate. On the other hand, the advantage of an unsecured loan, such as a balance transfer loan, is that you don’t have to worry about collateral. And you can usually find a credit card with a low fixed interest rate.
The drawbacks of debt consolidation usually arise when people don’t have a plan for paying off their new loan. It’s the same downside as debt, in general. You can consolidate debt to help you manage your loans (and getting cash back and a lower interest rate can help lighten the load). But if you don’t have a plan to become debt free, consolidating won’t help you in the long run. On the other hand, if you view debt consolidation as a fresh start and an opportunity to make a plan and take action, it can be a huge help to finally paying off your loans.
The answer to this question is up to you. But if you have multiple debts and you’re ready to simplify life, find a more rewarding credit card, or finally tackle your debt, debt consolidation is a great option. To learn more about debt consolidation and balance transfers, visit Utah First for a complimentary credit review.