Are you having trouble juggling payments with different terms and due dates for several high-interest debts? You are not alone. But managing debt shouldn’t feel like a juggling act. If you feel like you’re falling behind even when you start to catch up on repaying debts, debt consolidation could be a great option for you.
At Camino Federal Credit Union, we have been serving Montebello since 1941 with local guidance and financial products tailored to each member’s needs and goals to help them regain control of their finances and build a bright financial future by consolidating high-interest debt. Learn more about this strategy from our blog.
What Is Debt Consolidation?
Debt consolidation is a type of debt refinancing that involves taking out one loan to pay off several other existing debts. You can get different kinds of loans to consolidate debt depending on your circumstances, like home equity loans or personal loans.
With a debt consolidation loan, you apply for a loan for the amount you own on existing debts. If you receive approval, this loan will pay off those balances. In doing so, you combine multiple debts and debt payments into a single, manageable payment.
What are the Benefits of Debt Consolidation?
Consolidating your debts could offer several benefits that can help you regain confidence and control of your finances. Different ways you can benefit from a debt consolidation loan include the following.
Debt consolidation combines multiple outstanding debts into a single loan, which could reduce interest rates and payments and simplify virtually all aspects of your finances, like budgeting, for example.
If you have a debt consolidation loan with a lower interest rate, we advise making extra payments with the savings, which helps repay your debt earlier while saving even more on interest in the long run.
Getting a Fixed Repayment Schedule
With debts from credit cards, for example, you do not usually have a set timeline for repayment. However, debt consolidation loans have fixed monthly payments with a clear timeline that has a pre-determined beginning and end so you can finally put this debt behind you.
Lowering Your Interest Rate
If your credit score has improved since applying for the loans or credit cards that put you in this position, you could also decrease your overall interest rate by consolidating debts into a single, low-interest loan, saving substantial money in the long run.
Reducing Monthly Payments
When you consolidate debt with one of these loans, your overall monthly payment could also decrease because your future payments will be spread out over a new and possibly extended term.
Improving Your Credit Score
Debt consolidation can positively affect your credit score. By reducing the chances of making a late payment or missing a payment entirely, you will be able to improve your credit score. Also, by paying off revolving lines of credit and bringing past-due accounts current, like credit cards, you could reduce the credit utilization rate (which should ideally be under 30%) on your credit report.
How Debt Consolidation Loans Work
Essentially, with debt consolidation, you are rolling all of your debt into one loan with several potential benefits that can help simplify and improve your financial situation.
When using a personal loan for debt consolidation, or any debt consolidation loan for that matter, there is generally a process similar to applying for most loans:
- Make a list of your debts, outline the amounts paid, monthly payments, and interest rates, and add up your debts to determine how much you need to borrow.
- Check your credit and fix any errors that could negatively affect your score.
- Gather your loan application documents, like pay stubs, W-2s, bank statements, and tax returns.
- Shop around for great rates and terms and prequalify if possible.
- Submit your application to take out a new loan.
- Use the new loan to pay off your old debts.
- Pay off the new loan.
Who Qualifies for Debt Consolidation?
You must meet some eligibility criteria to qualify for consolidating your debt with this financing option. To qualify for debt consolidation, you should:
- Be at least 18-years-old
- Live in the United States
- Have a credit score that qualifies you for lower rates
- Have proof of income
- Be financially stable.
When Should You Consider Using Debt Consolidation?
Debt consolidation could be a great option, but you must be sure it is viable for you and your situation. For example, if your credit score isn’t high enough to qualify for a lower rate, it may not make sense. Consider consolidating your debt if:
- You have a large amount of debt in the form of several high-interest loans.
- You expect to pay off your debt in the next five years.
- Your credit is good enough to qualify for a 0% credit card or low-interest debt consolidation loan.
- You make enough or have the financial stability to cover payments toward your debt.
- You have plans to improve your financial habits if your debt is the result of overspending or financially irresponsible behavior to prevent future debt.
- You have multiple monthly debt payments and want to simplify and expedite repayment with fixed, reduced monthly payments.
What Types of Debt Can I Consolidate?
Debt is basically categorized into two groups when determining what you can and cannot combine using a debt consolidation loan: secured debt and unsecured debt.
With secured debt, you receive something in exchange for the financing you use. In other words, you receive a house for a mortgage or a car for your auto loan. These items become collateral on the loan. With unsecured debt, however, you don’t have collateral.
Credit card debt, for example, is unsecured, and a credit card company extends a credit line in good faith based on your credit score. If you fail to pay back what you borrowed, they have to sue you in civil court and can’t repossess property to reclaim what you owe.
Generally speaking, you can consolidate any type of unsecured debt, or debt without collateral, such as:
- Credit card debt
- Store cards
- Gas cards
- Unsecured personal loans
- Unpaid medical debt
- Payday loans
- Past due utilities
Apply for a Debt Consolidation Loan to Simplify Your Finances, Save Money, and Rediscover Your Financial Confidence!
If you are ready to put your debt behind you and put yourself on track to a bright financial future, then debt consolidation could be a great option! With this tool, you merge several high-interest debts into a single loan with lower rates to simplify your finances, repay debt faster, and save substantial money in the long run.
Visit our Debt Consolidation page to apply for a debt consolidation loan today!