How to Manage Debt Through Loan Consolidation

Tuesday, February 11, 2020
man frustrated by credit card debt

For the average person, credit- and loan-based transactions are just a fact of daily life. Last year, nationwide credit card debt yielded the country’s largest banks billions of dollars in profits. Still, the everyday routine of managing debt from multiple credit cards, personal loans and other expenses can grow increasingly difficult. 

Considering this, loan consolidation programs can prove to be a valuable financial tool for some. However, you need to be certain that you understand the terms and conditions of the debt consolidation loan — and how they can affect your lifestyle and your debt.

Benefits of Loan Consolidation Programs

Debt consolidation is a financial way of streamlining outstanding debt owed to multiple creditors by rolling them all into one loan — hopefully one with advantages for you. For example, instead of making six different payments to six different creditors at six different interest rates, a consolidated loan has you make one payment against a combined total of those six debts. Instead of having six bills, you have one bill calculated from one grand total and all with one interest rate.

For most people, debt consolidation has two main attractive features:

  • The single monthly payment is usually lower than what your different individual monthly payments would tally.
  • The new interest rate is usually lower than the rate that the original individual debts carried.

Those two factors together sound like certain relief, and they may or may not be. It all depends on the terms and conditions associated with the debt consolidation program that you’re considering working with and your particular loan.

Important Considerations for Debt Consolidation Loans

Just as they do for other financial services that they offer, credit unions and other lending institutions establish their own terms and conditions for their debt consolidation products. This includes the interest rate on the loan and the length of the loan’s term.

Interest Rates on Consolidation Loans: A low, low interest rate is an attention grabber. However, extremely low interest rates are often promotional and temporary. The minimal interest rate may be available only for a limited time like three or six months. 

Once that introductory period is over, the loan’s interest rate typically adjusts to a higher percentage. Even if a permanent rate is low, it may not be enough to offset the length of the term and what that will cost you over time.

Lengths of Term on Consolidation Loans: Debt consolidation loans do not reduce the total of what you owed your creditors. For example, if you had five different debts totaling $25,000, you can use the new consolidation loan to pay those off, but your outstanding balance will still be $25,000. 

The way a consolidation loan is able to reduce monthly payments and give you a lower interest rate is by lengthening the term—the time you have to repay the debt.

Your Benefit Analysis: A lower monthly payment with a lower interest rate and a longer period of time to pay it all off may be just what you need at the moment. The only way to know for certain whether loan consolidation is right for you over time is to do the math.

  1. Analyze the outstanding balances you might want to consolidate. For each account, you need to write down exactly how much you owe in total on it, the interest rate that applies to it, the monthly payment for it, how long it will take you to pay it off and how much that will total in interest.
  2. Tally your outstanding balances and monthly payments so that you know exactly how much you owe overall and how much in total you owe monthly.
  3. Analyze that total outstanding balance using lower potential interest rates and the monthly payment you can afford. Use those figures to compare how long it would take you to pay it off and how much that would total in interest.

It may sound like a lot of work, but it’s worth it to know exactly where you stand before making such a serious financial decision. Is the reduced cost month to month worth paying more in the long run? That’s a question you’ll have to weigh for yourself.

Tackle Your Debt at La Capitol

Debt consolidation can be a great financial tool when used wisely. It can give you a way to pay off high-interest loans and outstanding balances at a more favorable rate. If you prioritize ambitious monthly payments and take advantage of low introductory rates, you can use them to shorten repayment terms, reduce stresses on your budget and even save money.

Here at La Capitol Federal Credit Union, we want to ensure our members have the best financial products available to serve your credit needs, and that includes our debt consolidation programs. We’re not a debt settlement company that will pocket your money on empty promises. 

We’re a federal credit union dedicated to helping our members—local Louisianans like you—improve their finances. Stop by one of our neighborhood branches, or contact us online. Let us help you manage your debt so that you can get back to enjoying life.