Debt Consolidation: What Is It and How Can It Help
Being in debt can quietly weigh on your financial well-being and peace of mind. It often means more of your income goes toward interest payments instead of savings or goals, making it harder to build momentum – affecting not just your wallet but your overall sense of financial security. Debt consolidation is an effective strategy to get bills back under control for those who owe. And that category seems to include most people these days, as more than a third of Americans — 35% — have as much or more debt than they’ve ever had before, according to the 2023 edition of the research series called the “Planning & Progress Study.” https://thefinancialbrand.com/news/banking-trends-strategies/how-much-debt-do-americans-owe-on-average-165466
What is debt consolidation, and how can it help?
Consolidating debt involves paying off most or all of those owed and effectively shifting the burden to a single lender. Ideally, that leaves just one monthly payment to make, and usually that payment is less than the total of all of the previous minimum payments. Often, total interest costs can be reduced, leaving more money to cover other expenses. Plus, not having to deal with a stack of bills can cut down on errors, missed deadlines, and overdrafts and may help eliminate hefty fees and damaged credit.
Consolidation options
Most people have a number of options when it comes to consolidating debt, each with its own advantages:
Home Equity Financing
Homeowners can use the equity they’ve built up in their property by borrowing against it to pay off credit card balances and other high-interest loans, a move that with current rates often reduces monthly payments dramatically and may provide a tax benefit as well.
Those who own a home and owe less on the mortgage than the home is worth may be able to take advantage of this option, which comes in two basic forms. The first is a home equity loan, which is a fixed-term loan. The second is a home equity line of credit (HELOC), which allows you to borrow money as you pay your balance down, up to the credit limit. Both types of loans use your home as collateral.
Credit unions often offer lower rates on this type of financing than banks are able to provide, and some lend borrowers up to 90% of the accumulated equity (the home’s value minus any mortgage balances) with up to 15 years to pay it off.
While mortgage rates have climbed from historic lows, home equity financing can still cut the cost of consolidated debt.
Personal loans
For those who don’t own a house or simply aren’t comfortable using their home as collateral, personal loans can provide another way to consolidate. The interest cost may be higher than with home equity financing because personal loans are typically unsecured, or not backed by property. Personal loans usually have shorter terms than equity loans, which can lead to a higher payment than other types of loans.
In a pinch, owners with relatively new cars and some built up equity in the vehicle may be able to use that as collateral to get a lower-rate auto loan to pay off other debt.
Credit card balance transfers
Another way to consolidate involves transferring balances onto a single credit card. A number of credit cards permit transfers from other cards, often with an initial discount on the interest rate for a few months to more than a year. Others will take on the transferred balances without charging an upfront fee. Remember the savings may disappear rapidly if the balance isn’t paid off before the low-rate introductory period ends and the regular rate kicks in.
When to consolidate
If you are starting to feel overwhelmed by your financial obligations, now may be the time to take a serious look at simplifying life by consolidating some or all of that debt. This can also offer a strategy for handling a balloon payment that may be looming, say from the end of an auto lease for a car you’d like to keep. By taking a few simple steps, you may save money each month while spending less time dealing with bills.
Roberta Pescow, NerdWallet