Most people are familiar with the term “debt consolidation,” but they might not understand exactly what it means. Yes, it’s a way to reduce debt and pay less interest; however, the term itself can be intimidating. Often, members feel the process is too involved, or they’re confused about the benefits.
Not to worry. We’re here to unpack everything you need to know about debt consolidation – including how to use this process to eliminate debt quicker and pay substantially less interest along the way.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple credit cards or personal loans into a single loan. The goal is to obtain more favorable terms, such as a lower interest rate. And with only one payment to manage monthly, it’s much easier to get control over your finances.
Example:
Imagine you have three credit cards with different balances and interest rates:
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Credit Card:
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Outstanding Balance:
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Interest Rate:
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Card A
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$1,500
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14.99% APR
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Card B
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$750
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17.99% APR
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Card C
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$2,000
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24.99% APR
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Your total outstanding balance is $4,250. Through debt consolidation, you can combine all these credit card balances into a new loan or credit card. Ideally, you’ll secure a lower interest rate, resulting in instant and significant savings.
Types of Debt Consolidation
Two of the most popular means to consolidate debt are through a credit card or personal loan. Each offers unique benefits.
- Credit Card Balance Transfer
Using the example above, you could transfer all those outstanding balances to a new, lower-rate credit card. Now, you’ll have one credit card with a balance of $4,250. With a lower interest rate, you’ll instantly reduce how much you were paying monthly. And with less going toward interest, you can chip away at the debt quicker.
- BENEFIT: A major benefit of a credit card balance transfer is that you choose how much to pay monthly (making at least your minimum payment). This feature gives you added flexibility – allowing you to pay more for some months than others.
- DRAWBACK: One downside is that if you only pay the minimum payment (or close to it) monthly, your outstanding debt could become a long-term hurdle. So, you want to ensure you have a repayment plan in place so that you’re reducing the balance consistently.
- Personal Loan
Consolidate debt with a Personal Loan. Your outstanding credit card balances will be transferred to a new, unsecured loan (ideally, with a lower interest rate). Much like a car loan, you’ll have a predetermined monthly payment. Your loan will also have a set term – letting you know exactly when you’ll be debt-free.
- BENEFIT: With fixed monthly payments, you’ll typically pay off the debt much faster than if you were making payments on a credit card (where you choose the payment amount). And by eliminating the debt quicker, you’ll save substantially more interest.
- DRAWBACK: Unlike the credit card option, you won’t have as much flexibility. Your payment is fixed, and the full amount due is required monthly.
Don’t Be Intimidated About Debt Consolidation
Yes, financial jargon can often be confusing – leading to stress and anxiety. However, debt consolidation is a quick and easy process that instantly saves you money. Here’s a step-by-step guide on how to consolidate debts.
- Identify Debts to Consolidate.
First, you’ll want to make a list of all the credit cards, personal loans, or payday loans you might have open. If you’re unsure, you can access a free copy of your complete credit report at www.AnnualCreditReport.com. Your credit report will list all credit and loan accounts open in your name.
- Gather Records for Each Debt.
Next, you’ll want to gather your loan paperwork or most recent credit card account statement. Put all these documents into a folder.
- Contact the Credit Union.
One of our team members will review your current loans with you. Then, you’ll receive options, such as a credit card balance transfer or a personal loan. You’ll have the opportunity to ask questions and review different scenarios for each option – including payoff dates and potential interest savings.
- Finalize Your Debt Consolidation Loan.
Once you decide on the type of debt consolidation loan (credit card or personal loan), the credit union will pay off your existing debts. Then, they will transfer those amounts to a new, single loan with the credit union.
It’s that simple! Our team will do all the heavy lifting – identifying which loans you can consolidate and providing options with the greatest savings potential. All you need to do is gather paperwork and initiate the process. Again, your goal is to secure a lower interest rate so you can save on interest immediately.
We’re Here to Help!
Once you understand how debt consolidation works and the immediate savings it provides, you’ll wonder why you didn’t jump on board sooner. It’s a simple process that often sounds intimidating. However, it’s one of the easiest ways to put more of your hard-earned money back in your pocket – and reduce debt quickly.
If you’re ready to eliminate high-interest debt and simplify your financial life, we’re prepared to help. Please give us a call to speak with a team member today.