Use Consolidation to Conquer Debt

When life gets complicated, it usually gets expensive. Often, we have no choice but to borrow the money we need for unexpected repairs or unavoidable expenditures. Over time, you may find yourself facing multiple loans or lines of revolving credit that you took out one by one but that are now placing uncompromising demands on your limited financial resources. 

Juggling balances and payments on those various debts can be overwhelming. If it’s all more than you can handle, you might want to consider a debt consolidation loan. It could help you pay off your existing debt and maybe even save you money in the process.

The Trouble with Too Many Loans

While having multiple sources of available credit is often considered a sign of financial health, running up balances that you can’t pay off or pay down is a sign of financial trouble. One of the most common issues is having multiple credit cards with significant balances that are accruing interest.

Each will have its own payment due date and its own way of calculating the minimum payment as well as an APR (annual percentage rate) in interest applied to any balances that you carry. If you miss a due date, you may be subject to penalty fees or interest rate hikes. For many, keeping track of a number of credit cards or small personal loans in addition to life essentials like rent, utilities, a car payment, insurance and other necessities, can become a losing battle in scheduling, budgeting and cash flow.

How Debt Consolidation Loans Work

Debt consolidation loans offer a streamlined way of converting multiple separate debts into a single one — usually one with terms that are more manageable and more favorable for you. The process is usually straightforward.

1. You apply for a debt consolidation loan. The financial institution potentially issuing the loan usually requests figures and detailed information regarding the debts that you intend to pay off. Lenders usually combine this information with your credit history to calculate the total loan amount they’re willing to lend as well as the interest rate, term length and monthly payment schedule that would apply to your new loan.              
    
2. Once your loan is approved, the financial institution issuing the debt consolidation loan will pay off the existing debts that are to be rolled into the loan. Usually, the debt consolidation loan lender will pay funds directly to your former creditors and may also close the accounts.              
    
3. The debt consolidation will take the place of the multiple debts as one loan with its own specific terms and conditions. You’ll no longer be responsible for making payments to multiple creditors. Instead, you’ll make payments on the debt consolidation loan.

While a debt consolidation loan offers a single solution to pay off multiple debts, it’s still a form of credit that entails repayment of the total balance plus interest over a set period of time. To ensure a consolidation loan offers the kinds of benefits that you need, be sure to evaluate how a prospective consolidation loan’s requirement might compare with your existing debt structure.

Potential Benefits of a Single Consolidation Loan

To be able to make an accurate evaluation of how a debt consolidation loan might improve your financial picture, you need to know how your current loan payments are structured. That means not only knowing the balance and annual percentage rate but also understanding how the creditor calculates the minimum payment due — usually a combination of interest and a certain percentage of the balance — and how long full repayment might realistically take. When you compare your current debt payment strategies against one designed to consolidate your debts, you should be looking for at least three benefits.

1. A debt consolidation loan should save you money in interest: With the average credit card assessing interest carrying a variable APR of around 20 percent, accrued interest can nudge account balances steadily upward despite you making regular payments. It can even send balances over credit limits. Loans designed to consolidate debt typically carry much lower interest rates — often half the credit card rate.             
    
2. A debt consolidation loan should help you stick to your budget: Credit cards and other forms of unsecured debt are subject to variable rates, constantly compounding interest, and fees and penalties that can make payments jump and balances grow. In addition to offering lower interest rates, many debt consolidation loan programs offer fixed payment options so that your payment is always the same for the term of the loan.    

Just as you would for any type of credit, you should be clear about a potential debt consolidation loan’s interest rate, amount of interest to be paid in total, payment schedule, and payoff date. You should know any origination fees, service fees, penalties, potential payment or rate adjustments.

Consider a La Cap Debt Consolidation Loan 

Debt consolidation loans are available in a number of forms. While some loans are originated specifically as debt consolidation loans, you’ll also find that personal loans, home equity loans, home equity lines of credit or even credit card balance transfers may also be viable debt management options. 

If you’d like to learn more about the best way to handle and pay off multiple sources of debt, reach out to the loan experts at La Capitol Federal Credit Union. We’re here to provide competitive financial solutions for our members, and that includes helping you gain control over your debt.