What do I Need to Know About Debt Consolidation?

Q: Help! I’m drowning in debt! I’ve heard about debt consolidation, but what do I need to know before moving ahead?

A: Debt consolidation is the process of moving multiple high-interest debts into a new loan or line of credit.

Here’s what you need to know about debt consolidation.

What are the benefits of debt consolidation? 

Saving on interest payments. Moving your debts to a new loan or credit line with a low interest rate can translate into big savings.

One monthly payment. Say goodbye to scrambling to keep track of and make all your monthly payments!

Fixed payment timeline. How does knowing when you’ll be debt-free sound?

Boost your credit score. Amp up your score with a balance transfer or loan.

What are the disadvantages of debt consolidation? 

May stretch out the payment timeline. More time in debt? No thanks.

Won’t eliminate irresponsible spending habits. You won’t turn into a budgeting beast just because you’ve relocated your debt.

Lower interest rate may not last. Many low- or no-interest credit cards only offer these features as a temporary promotion. Once time is up, the high interest rates hit. Ouch!

How can I consolidate my debt?

  1. Unsecured loan — This will allow you to pay off all your outstanding loans immediately and move your debts to one low-interest loan.

Unsecured loans usually have origination fees and other charges. Also, the interest rates on these loans can be sky-high.

As a member of Olean Area Federal Credit Union, though, you have access to unsecured loans with lower interest rates than you’ll find at most banks. 

  • HELOC — Use your home as collateral for an open credit line.

The drawback here is that you risk losing your home if you don’t pay up. Also, repayment terms can be upward of 10 years.

On the flip side, interest payments on HELOCs will be affordable and possibly tax-deductible.

  • Balance transfer — Move your debt to a new credit card with a low interest rate or a zero-interest offer.

The disadvantage with putting more plastic into your purse is that you may rack up a new credit card bill. Also, the low interest or no interest may not last.

As a member of Olean Area Federal Credit Union, you can take advantage of our low APR credit cards to help you get out of debt quicker.

* APR = Annual Percentage Rate. You can explore current deposit and loan rates by clicking here.

Want to learn more about debt consolidation? Call us at 800.854.6052, or click here to send us a message.

Debt Consolidation: Not A Silver Bullet, But Still A Good Idea

Using a personal loan to refinance your existing debt can make your debt more manageable. You’ll have one monthly payment at one interest rate instead of many smaller bills due on different days of the month.

Will personal loans work for you?

1. Have I fixed the debt problem?

Think about why you’re in debt. If a medical bill, job loss or some other temporary hardship describes your situation, the fact that you have a job or have paid the medical bill means you’ve solved the problem that caused the debt in the first place.

If, on the other hand, you accumulated debt by overspending on credit cards, a debt consolidation loan may not be the answer just yet. First make a budget you can stick to, learn how to save and gain responsibility in your use of credit. Getting a debt consolidation loan without doing those things first is a temporary solution that can make matters worse.

2. Can I commit to a repayment plan?

If you’re struggling to make minimum monthly payments on bills, a debt consolidation loan can only do so much. It’s possible that the lower interest rate will make repayment easier, but bundling all of that debt together could result in a higher monthly payment over a shorter period of time. Before you speak to a lender, figure out how much you can afford to put toward getting out of debt. Your lender can work backward from there to figure out terms, interest rate and total amount borrowed.

If you’re relying on a fluctuating stream of income to repay debt, it may be difficult to commit to a strict repayment plan that’s as aggressive as you like. You can still make extra principal payments on a personal loan, so your strategy of making intermittent payments will still help. You just can’t figure them into your monthly payment calculation.

3. Is my interest rate the problem?

For some people, the biggest chunk of their debt is a student loan. These loans receive fairly generous terms, since a college degree should generally result in a higher-paying job. Debt consolidation for student loans, especially subsidized PLUS loans, may not make a great deal of sense. You’re better off negotiating the repayment structure with your lender if the monthly payments are unrealistic.

On the other hand, if you’re dealing with credit card debt, interest rate is definitely part of the problem. Credit card debt interest regularly runs in the 20% range, more than twice the average rate of personal loans. Refinancing this debt with a personal loan can save you plenty over making minimum credit card payments.

4. Will a personal loan cover all my debts?

If you have more than $50,000 in credit card debt, it’s going to be difficult to put together a personal loan that can finance the entire amount. It’s worth prioritizing the highest interest cards and consolidating those instead of trying to divide your refinancing evenly between accounts. Get the biggest problems out of the way, so you can focus your efforts on picking up the pieces.

Debt consolidation doesn’t work for everyone, but it can do wonders for many people. The ability to eliminate high-interest debt and simplify monthly expenses into one payment for debt servicing can change a family’s whole financial picture. Gather your account statements and your paycheck stubs, and contact Olean Area Federal Credit Union today!

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