Pondering a Debt Consolidation Loan?

Managing multiple large bill payments can be overwhelming — especially when high interest rates and deadlines are involved. Even if you earn a steady income, keeping up with emergencies and other unplanned expenses can send even the most financially responsible individuals into a tailspin.

So how can we bring order to the chaos? Debt consolidation is one tool that can help you manage your debts more affordably. If you’ve been struggling with how to reduce debt for easier monthly payments, a debt consolidation loan might be the solution.

What Is a Debt Consolidation Loan?

Typically, available through various types of loans, debt consolidation is designed to absorb multiple debts, expenses or loans into one cumulative sum. The concept is that the terms and conditions of the consolidation loan will be more favorable than the terms and conditions of each individual debt being combined. And what’s more — you now have just one loan to track and pay down instead of a handful.

People use consolidation loans to reorganize all sorts of expenses, but some of the most common reasons include medical bills, credit card debt, house renovations, vehicle purchases or repairs, wedding expenses, funeral expenses, student loans or educational expenses, and even everyday living expenses.

This can be especially helpful when bills pile up and everything is due within the same short timeframe. By consolidating the debts, you can pay them all down at once while also giving yourself more time based on the total sum. Depending on the type of debt, the sums involved and your own financial details, you may have a number of options for consolidation:

• Personal loans typically require little or no collateral and are often referred to as signature loans. You borrow a certain sum to cover the debts you want to consolidate and repay that sum over time according to the terms and conditions of the loan.
• Home equity loans use the equity that you have in your home to determine the loan amount you may be eligible for. You borrow the entire sum up front and then repay it over a set period of time according to the loan’s terms and conditions.
• Home equity lines of credit also track to the equity that you have in your home, but HELOCs issue their lending figure as a line of credit with a credit limit. Therefore, you pay only for what you actually use. HELOCs usually have a draw period and a repayment period. During the draw period, homeowners can borrow from their credit limit anticipating minimal repayment requirements. Once the repayment period begins, however, borrowers must repay remaining balances of interest and principal according to repayment period terms and conditions.
• Balance transfers are designed to let users transfer debt from one credit card or debt source to another account that has more favorable terms and conditions like a very low or zero-percent introductory interest rate for a certain period of time. Balance transfers are unsecured debt and may come as a personal line of credit.
   

What Are the Pros and Cons of Debt Consolidation Loans?

As with any financial borrowing tool, consolidation loans offer significant positives. However, here are some important things to consider before jumping in:

Identify Your New Payment Amount

Consolidation can streamline your debt situation by reducing multiple payments and their accompanying deadlines into one that you are much less likely to miss. Depending on how the loan or line of credit is structured, you most likely will have a standard monthly payment and foreseeable payoff date. Typically, the monthly payment is less than the sum total you would have been paying for the individual debts you are consolidating.

Understand Your Loan Conditions

Consolidation loans and lines of credit typically offer interest rates, terms and conditions that are more favorable than those offered by individual credit cards or private vendor billing. If you are unable to pay off monthly balances in full on individual bills, those bills typically accumulate considerable interest. Consolidation can help you avoid spiraling interest accumulations and pay off principal sooner.

Also remember: Consolidation does not make your debts disappear. It reconfigures them into something more financially manageable that you can pay off over time. Consolidation often comes with longer payoff terms that allow lower payments, but those payments have to be balanced with continuing expenses and lifestyle decisions.

Read the Fine Print

Some loans or lines of credit may have origination fees or other attached costs. For example, home equity loans and lines of credit may require a formal home assessment out of pocket to establish equity figures, or balance transfers may charge a flat balance transfer fee or assess a percentage of the balance transferred. Some costs may be rolled into the loan for convenience, but they are still an added expense that increases the principal borrowed.

Effects on Credit Score

Consolidation terms may require that you close accounts that you are consolidating. Closing accounts can shorten your credit history length and ding credit score calculations, which is a con. On the other hand, if you are able to keep accounts open and resist using them, a consolidation can actually improve your credit utilization ratio and, in turn, your credit score — especially if you remain current with your payment history.

Also, applying for consolidation may require a hard credit inquiry, which will become part of your credit report history and may impact your credit score.

For most people, the advantages of a consolidation loan outweigh many of the negatives. Much of whether consolidating multiple debts is a viable solution depends on your personal financial situation and the terms and conditions associated with a particular potential loan or line of credit.

Who Can Benefit Most from a Debt Consolidation Loan?

Forbes Advisor’s 2023 debt consolidation trends survey found that “54 percent of respondents used a personal loan for debt consolidation to simplify and reduce their monthly payments, 42 percent to lower their interest rates and 35 percent to reduce their overall debt burden.” The survey also found that “59 percent of respondents managed to consolidate all their existing debts through one loan, while 30 percent reported that the loan did not cover all of their debts.”

Those statistics provide a pretty comprehensive picture of who can benefit most from a debt consolidation loan:

• Individuals with multiple debts with different payment schedules can simplify billing to one payment. They’ll be less likely to miss a payment.
• Individuals with multiple high-interest debts can take advantage of the typically lower interest rates available for consolidation loans. They’ll be able to pay more to principal and pay off their debt faster.
• Individuals with multiple payments may be able to go to one payment that is lower than all of the individual payments together. Their payment will be more affordable for their budget.
• Individuals with solid credit profiles are more likely to qualify for more favorable loan options, terms and conditions. They’ve demonstrated their financial trustworthiness, and their consolidation repayment will most likely contribute positively to their credit record.

Crush Your Debt with La Capitol

Chances are, you identify with several or all of these scenarios. And, if you do, it’s time to do something about it. The first step is to check out the debt consolidation loan options at La Capitol Federal Credit Union. Then, reach out to one of our experienced loan specialists to discuss how to reduce your debt burden. See how debt consolidation can work for you.