Should I Get a Loan to Consolidate Debt?
- Better Borrowing
- Frontwave Credit Union
If you’re juggling multiple credit cards or other loans, you may be wondering whether it’s wise to consolidate them all into one. It’s true that in some cases, consolidating your debt can help you save money and pay off your debts faster. But it’s not always a magic bullet for financial independence. Let’s take a look at the facts.
Debt Consolidation Options
Some financial institutions specifically offer debt consolidation loans. These may come with certain requirements and restrictions. An alternative is to look into getting a personal loan. Or, if you have a larger amount of debt and have equity in your home, you might consider a home equity loan or line of credit. In any of these cases, you would use the proceeds of your new loan to pay off your debts, then pay that new loan back in monthly installments over the life of the term.
If getting a traditional loan isn't appealing to you, you may be able to consolidate your debts by transferring all of your balances to a credit card. The best option if you go this route is to find a card with a 0% interest balance transfer offer. These offers typically let you transfer balances from other sources to the new card for a small fee, then pay no interest on that balance for a set period of time. Your goal would be to pay off your new balance within the promotional period to avoid paying interest on it.
Keep in mind that for each of these options, the terms and interest rates can vary widely. It’s important to read the fine print carefully and ask questions to be sure you understand exactly what you’re signing up for.
When Debt Consolidation Makes Sense
Consolidating your debt may make sense if:
- You can get a lower interest rate on the new loan/card
- You have enough income coming in to cover the regular payments on your debt
- You have a plan to avoid running up more debt in the future
If you’re considering a balance transfer to consolidate debt, check out our handy credit card payoff calculator to see what your monthly payment would be and how long it would take you to pay off your debt entirely.
When Debt Consolidation Isn’t Worth It
Consolidation may not be worth the effort if you have a smaller amount of debt that you expect to pay off in 6-12 months and/or consolidating wouldn’t save you that much money in the long run.
Getting a loan or transferring your debt to a single credit card may not be the right solution for you either if:
- You’re overwhelmed with debt and have no way of realistically paying off what you owe
- You don’t have a plan to avoid running up more debt in the future
- You can’t qualify for a loan or credit card with a lower interest rate than you’re paying now
In these cases, you may be better served by financial counseling and a debt management plan. As a Member of Frontwave, you have access to free financial counseling through GreenPath Financial Wellness. Simply call 877.337.3399 or visit www.greenpath.com/frontwave to see how a financial counselor may be able to help.
Interested In Learning More?
Know that you know the basics of debt consolidation, why not keep your financial education going by checking out one of our upcoming free virtual workshops, which cover everything from the fundamentals of personal finance, to auto and home buying, to investing and planning for retirement.