Have you heard the term “debt consolidation” tossed around? It sounds both intimidating and interesting. A way to simplify your debt and monthly payments? Perfect! But debt consolidation isn’t for everyone, especially if you don’t want to rush into something that isn’t right for your finances.
Luckily for you, we’ve outlined the basics of what a debt consolidation loan is, its pros and cons, and how to tell if it’s a good match for you. So, what’s the deal with debt consolidation? Read on to find out!
What is a debt consolidation loan?
A debt consolidation loan can come in many forms, but the purpose of it remains the same: to streamline your finances by combining your various debts into a single loan. The consolidation process allows you to pay off multiple debts with one new loan or a balance transfer credit card. By consolidating, you won’t have to juggle multiple various payments and you can sometimes qualify for a lower interest rate on the new loan.
How you choose to consolidate is up to you and your lender. You might be able to find a specialized debt consolidation loan, but most people use credit card balance transfers or personal loans for debt consolidation. At Inspire Federal Credit Union, we suggest using our personal loan to consolidate your debt.
Pros & Cons
There are many pros and cons to think about when you consider a debt consolidation loan. Here are just a couple to consider:
Pay Off Debt Faster
Debt consolidation could help you pay down your debt earlier. If your new loan has a lower interest rate and helps you save money each month, you could pay down your loan faster by making extra payments with the money you saved.
Reduce Monthly Payment
If your new loan accrues less interest than your various individual loans would, then you’ll save money in interest, giving you a lower monthly payment overall. This way, you can enjoy having more money in your account at the end of each month.
Could Increase Interest Rate
If your credit score isn’t high enough to qualify for a lower interest rate, then a debt consolidation loan might cause you to pay more in interest over time. Make sure to consult with our team at Inspire about what your rate could look like.
Doesn’t Solve Underlying Problem
A debt consolidation loan can certainly help you organize your finances and make them more manageable, but it won’t solve the financial habits that caused the issue in the first place. If you choose to consolidate debt from things like maxed-out credit cards, make a plan to build better financial habits so you don’t find yourself in deeper debt down the line. If you need help making a plan, reach out to our team by contacting us.
Is it a good solution for you?
Debt consolidation isn’t the right solution for everyone, but it can be a very powerful financial tool when used correctly. If you have various forms of debt that are high interest and frustrating to manage, a debt consolidation loan is worth looking into. If you have a credit score high enough to qualify for a lower interest rate on the new loan, a debt consolidation loan is well worth your time. Just make sure you have a plan to improve your financial habits at the same time!
Want an opinion on if a debt consolidation loan is right for you? Reach out to our team, and we’ll help you find the right solution for your unique financial situation, judgment-free.