The average American carries over $100,000 in debt. That’s a lot of money, so this makes for scary reading. However, that number includes mortgages and auto loans. There are plenty of families with six-figure mortgages who are in stable financial condition.
However, others are not so fortunate. Collectively, Americans have over a trillion dollars in credit card debt. If your debt is becoming too much to handle, what should you do? Consolidation is an option.
What Does It Mean To Consolidate Debt?
Debt consolidation involves combining multiple high-interest debts, such as credit card balances or personal loans, into a single, new loan. Doing this replaces several monthly payments with one, typically at a lower interest rate. This simplifies repayment and can reduce the total interest paid over the life of the loan.
It begins by taking out a new loan, such as a line of credit or a balance transfer credit card. Yes, in this case, the answer to debt is to take on more debt — but there’s a purpose here. By using this new loan to pay off credit card balances and other loans, you can streamline your finances by having only one payment.
Debt consolidation is a common tactic for paying off unsecured debts, including credit card balances, medical bills and personal loans. And if you already have a bad credit score, it can be hard to secure the one loan you need to pay off the others. That’s why it’s best to pursue this tactic before you start missing payments.
The Pros of Debt Consolidation
Here are the benefits of consolidating debt:
- Simplicity: Remembering to make numerous payments or having several automatic withdrawals happening each month can feel overwhelming. With a single monthly payment to manage, you can ease stress and reduce your chances of missing a payment.
- Lower interest rates: You might qualify for a lower annual percentage rate than your existing debts offer — especially if it’s credit card debt — saving you money on interest.
- Faster repayment: A fixed term and lower rate can help you pay off debt quicker.
- Improved credit score: By consistently making on-time payments and paying off your cards, you can boost your score over time.
The Cons of Debt Consolidation
Here are the drawbacks of consolidating debt:
- Asset risk: Taking out secured loans, such as home equity loans, can help you consolidate your debt, but it also puts your home or car at risk if you default.
- Costs: Origination fees, balance transfer fees or closing costs can add to the total sum. A potentially higher interest rate: If you have a poor credit score, you might not get a lower rate, or your new rate could be even higher.
- Longer term, more interest: A lower monthly payment is great at first, but it can stretch for a longer period, costing you more in total interest over time.
The Caveat of Debt Consolidation
Consolidation is a tool that can help you pay off your debt more efficiently. But it won’t achieve anything if you don’t change your financial habits. If overspending caused your debt problem, you can’t solve it without cutting your expenses, regardless of how many individual loans you have. You can’t always control how much money you make, but by developing healthy financial habits, you can control how much you spend.
Want to learn more about your options? Contact a Vectra Bank professional, and we’d be happy to help.
