Whether your credit card balances have gotten out of hand or you’re just tired of tracking 15 different bills and payments every month, debt consolidation can be a great option—saving you both money and hassle over the long term.
Put simply, debt consolidation allows you to roll all of your debts (everything from medical bills and car loans to student loans and mortgages) into one single account or loan. Then you pay that comprehensive balance off with a single payment, month after month.
It’s a convenient way to streamline your debt payments, while also potentially saving on monthly expenses.
Options for Debt Consolidation
There are several ways you can choose to consolidate your debt, and like anything, each choice has its own pros and cons.
The best option really depends on your unique financial situation, as well as the types of accounts you have, the balances, and the interest rates you’re dealing with. Let’s take a look at some of the most common debt consolidation methods, as well as what it might mean for you:
- A debt consolidation loan – A debt consolidation loan works like this: you go to a bank, credit union, or lender, and apply for a loan in the total amount of all your debts. Once approved, the loan is used to pay off your balances in full. You’ll then pay the lender back for that loan via monthly payments, plus interest, for a set number of years—much like you would a mortgage loan.
- A cash-out refinance – Cash-out refinances can be a great option for homeowners—particularly ones who have a lot of equity in their properties. You’ll just need to refinance your mortgage to a larger loan amount, take the difference between your equity balance and the new loan, and use those funds to pay off the other debts and loans to your name. Just keep in mind: though you’ll no longer have your credit cards and other bills to pay, the balance on the mortgage will remain. That means you’ll still have one monthly payment after all is said and done (at least until your mortgage is paid off).
- A high-balance credit card – You can also apply for a high-balance credit card and, if approved, use it to pay off all your remaining loans and balances in full. This is a tricky one, though. While in some cases, it may be a smart financial decision, you’ll want to tread lightly. Make sure the interest rate is worth it (and will stay that way for the entire time you’re repaying!) If it’s not lower than the rates you have on other accounts or will rise a year or two down the line, you’re simply fighting fire with fire. You could even end up paying more in interest as a result.
- A credit counseling agency – A less common approach is to create a debt pay-off plan using a credit counselor or agency. They’ll negotiate with your credit card companies and other creditors on your behalf, and then create a customized payment plan to help you gradually pay off your debts over time. Usually, you’ll make a single monthly payment to the counseling agency, and they’ll handle the individual account payments from there. If you’re in dire financial straits, some agencies will even offer these services free of charge.
For homeowners, the single best option is usually a cash-out refinance. This option allows you to take advantage of today’s lower rates, while also making mortgage payments—and all other monthly payments—simple and easy to manage.
If you’re not a homeowner just yet, the best option really depends on your specific financial situation, as well as your balances and the interest rates you’re currently paying. Make sure to do the math before considering any debt consolidation route. What are your total balances? How much can you afford to pay each month on each? At that rate, how long will it take you to pay them off? If you can find a debt consolidation loan that offers a shorter term than that and a comparable or lower interest rate, you have a winner.
When in doubt, don’t be afraid to contact a financial advisor, accountant, or a loan officer. They’ll be able to provide you with more specific guidance regarding your debts and financial situation. Want to speak to an expert about your options now? Contact one of our loan officers today.