Should You Consider Debt Consolidation?

It’s almost impossible to miss the onslaught of debt consolidation ads in every branch of the media. They are everywhere! Before you make a decision to consolidate, educate yourself and make sure you are choosing the best option for your own financial situation.

What is Debt Consolidation?

The idea behind debt consolidation is to combine your existing loans into one new loan. This gives you only one monthly payment, which is easier to manage. The goal is to lower the interest rate and the monthly payment while paying off the debt quickly.
One note: Don’t confuse debt consolidation with debt settlement. Debt consolidation helps you pay your debt in full with no negative consequences to your credit score, while debt settlement is an agreement between the debtor and creditor to pay a reduced balance that will be regarded as payment in full. However, debt settlement has a negative impact on your credit rating and could even result in additional taxes being owed.
Your first step should be to gather all the information on your various loans and figure out exactly where you stand. There are several debt consolidation calculators online, and they can help you estimate the payment amount for a new loan. Mountain America Credit Union has a great calculator, along with helpful financial consultants, that can guide you through the process.

Secured vs. Unsecured Loans

Secured loans are those which secure the item you are purchasing, maybe a car or a home, as your obligation to pay, according to the terms agreed upon. This means that, in the event you stop paying on time, the lender can repossess the car or foreclose on the home to satisfy the loan.
On the flip side, unsecured loans require your promise to pay only and are not secured by any property. Credit cards are a great example of unsecured loans. These loans usually have a higher interest rate because they carry more risk for the lender.

Pros and Cons of Secured Loans

Luckily, there are plenty of options for this type of debt consolidation including refinancing your home, taking out a second mortgage or home equity line of credit. You could also use other assets, such as a car, as collateral to secure the loan.
Secured loans often offer lower interest rates, which help lower the monthly payment. In some cases, like loans secured with real estate, the interest may even be tax deductible. These loans are also generally easier to obtain because of the lower risk factor for the lender.
However, secured loans do have a downside. The property you offered as collateral is at risk through the life of the loan. If you can’t pay the loan back, you could lose your life insurance, retirement fund, home, car or whatever property you pledged.

Pros and Cons of Unsecured Loans

The biggest benefit of an unsecured debt consolidation loan is that no property is at risk. You don’t have to put your home on the line to get a credit card, for instance.
Speaking about credit cards, specifically, the interest rate may be higher than that you would find on a secured loan, but it may actually be less than you are paying on several high-interest credit cards that are carrying a balance right now. Often, credit unions offer lower-interest credit cards or balance transfer offers. In some instances, you might even be able to make money by transferring your balances to these cards. Be sure you understand the long-term ramifications of these offers before you sign up.
It’s great to have so many options, but it’s possible none of these will result in a monthly payment that is low enough to improve your financial situation. Be sure to look at the big picture, too.

Feeling Lighter

A major benefit of successful debt consolidation is the emotional relief—knowing you have been proactive about bettering your situation, not having to deal with multiple collection phone calls, and having a more manageable payment—and it all allows you to breathe a sigh of relief. Be wary of letting your guard down and falling into the same traps that got you into financial trouble in the first place. Avoid accumulating more debt, and stick to the payoff plan. This will help keep you on the road to financial freedom.
Above all, it is important to know there is help available. If you are serious about regaining control and improving your financial life, find a professional advisor and start today! Mountain America Credit Union is always happy to help our members, and the community, learn more about financial literacy. If you are interested in reaching out for financial advice, please contact us!

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