Debt consolidation: Is it right for you?
You are not alone if you have debt. According to the Federal Reserve Bank of New York, American households held combined debt of $16.51 trillion in the third quarter of 2022. And 63 percent of consumers surveyed for a March 2022 report by the Consumer Financial Protection Bureau have less than a month of income set aside for emergencies or—worse yet—have no savings at all.
These numbers are understandable. Financial obligations like rent and mortgage payments, utilities, transportation, food and medicine make it difficult to carve out even a small amount of money for savings. Without emergency savings, a financial shock like your car breaking down can plunge you into unexpected debt. Once you lose control of your debt it can be difficult to regain control, especially with climbing interest rates driving up minimum monthly payments and claiming an ever-larger portion of your paycheck.
Is debt consolidation a good idea?
One way to get control of runaway debt is to consolidate multiple loans into one loan, a process called debt consolidation. Debt consolidation can be a life preserver or an anchor depending on how you go about it. If you get your spending under control and can meet all your minimum payments in a timely manner, consolidating your debt could deliver multiple benefits:
- It may reduce the interest rate you’re paying.
- It might allow you to pay off your debt sooner.
- It could reduce the amount of money you spend each month making payments.
- It will consolidate multiple debt payments into one payment.
But debt consolidation is not a cure-all—it consolidates your debt, it does not erase it. If your spending habits are out of control, you need to address that before you take out a consolidation loan.
This debt consolidation calculator is designed to help determine whether debt consolidation is right for you.
How does debt consolidation work?
Secured loans are loans where you use something you own as collateral to secure the loan. You could use the equity in your home or vehicle, for instance. Secured loans typically have a lower interest rate than other types of loans because the collateral you use reduces the financial institution’s risk of loss.
Unsecured loans do not require collateral. Instead, the financial institution looks at your credit history and other factors and takes a calculated risk based on their assessment of your ability and likelihood to repay the loan. The interest you pay on an unsecured loan is typically lower than what you’re paying on credit card debt.
With both secured and unsecured loans, the interest rate, minimum payment and number of payments (the loan term) are fixed at loan closing. If interest rates go up while you’re paying off the loan, it doesn’t impact your monthly payment. You also know when your loan will be paid off assuming you make all the payments on time. If you can handle a higher payment, ask for a shorter loan term. You’ll pay your loan off faster and ultimately pay less in interest. But if you need a more affordable monthly payment, ask for a longer loan term. You can always make a larger payment in the months when you have extra money.
Low-interest credit cards are a popular way to consolidate debt because they are easy to get and most people are familiar with how credit cards work. Be aware that credit cards—even low-interest cards—typically have higher interest rates than secured and unsecured loans.
If you are considering consolidating multiple credit cards onto one low-interest card, there are some factors to consider. Look for a card that does not charge an annual fee, check the annual percentage rate (APR) of the card, and look for one that doesn’t charge you to transfer your balances. Balance transfer fees can run as high as 3 percent. The Visa Value card from Oregon State Credit Union offers a low APR, no annual fee, no balance transfer fee and no penalty interest rate.
If you’re considering a card that advertises a temporary “introductory” rate, make sure you understand how that works. These are temporary interest rates designed to lure you into applying for the card and transferring your balances.
You should also understand what might happen if you are a few days late making a payment. Many cards have a penalty interest rate that kicks in if you violate any of a number of terms listed in the card agreement. Read the fine print before agreeing to take the card. Make sure you understand:
- When the introductory rate ends.
- How high the rate goes up once it does end.
- How much any transfer balance fees might cost you.
- What the penalties are for late payments or other mistakes.
How do I get started consolidating my debt?
Whichever route you choose, your debt consolidation solution should ideally reduce the amount you pay each month servicing your debt, shorten the time it takes to pay off the debt and/or reduce the amount you are paying in interest. If it doesn’t accomplish at least one of those goals, reconsider whether debt consolidation is right for you.
Deciding which debt consolidation solution works best can be confusing. It helps to consult with a trained financial services consultant to explore your options. You can walk into any Oregon State Credit Union branch and sit down with one of our consultants to review your situation. We offer:
- Equity loans secured by your vehicle or home with attractive rates and terms that are fixed at loan closing.
- Personal loans with competitive rates and terms that are fixed at loan closing.
- Low-interest credit cards with no annual fee, no balance transfer fee and no penalty interest rate.
Apply online today or visit your local branch to talk to one of our financial services consultants about how you can regain control of your finances.
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