We all might dream of being debt-free someday in the future, but carrying debt isn’t always a bad thing. From mortgages to student loans to affordable car payments, debt can be a valuable tool to help you afford large purchases and build toward long-term financial security.
Problems only start when debt gets out of hand. With total credit card debt in the United States inching toward $1 trillion*, consumer debt can be a ticking time bomb if you let it get out of control. Similarly, large student loan debts — as well as mortgage, auto loan and other personal loan debts you can’t afford to pay — can jeopardize your financial wellness and put you on a path toward bankruptcy.
When debt starts to build, the worst thing you can do is bury your head in the sand. Even when debt seems insurmountable, you still have options to address your debt and rebuild your finances. Debt consolidation is a tried-and-true process that frees you from high-interest revolving credit, simplifies your debt payments and puts you on a path toward debt resolution and financial freedom.
Here’s a guide to understanding debt consolidation as well as tips on how to get started with this process.
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Dealing With Your Debt: The Financial Value of Debt Consolidation
While debt consolidation doesn’t erase your debts overnight, it does give you a solid path forward and can offer short-term financial relief as well.
Although some consumers worry that debt consolidation is merely a process of repackaging debt without achieving any significant gains in financial security or stability, the consolidation process can offer a number of important benefits.
Combine multiple payments into a single payment.
If you’re struggling to keep track of payments — and/or are struggling to make the minimum payments on these accounts — consolidation can help you streamline your payments, clarify your monthly obligations and create short-term financial relief.
Consolidate at a lower interest rate.
If you’re carrying debt that charges a high interest rate, such as credit card balances, debt consolidation can help you secure a more affordable repayment that greatly reduces interest paid. This reduces the total amount you’ll pay over the life of the loan, which can help you pay off your debt faster.
Improve your credit score by lowering your credit utilization ratio.
Once debt is moved out of revolving credit accounts and into a personal loan or other debt consolidation product, your revolving credit utilization will drop. This can produce a swift and significant increase in your credit score, especially if its main reason for decline has been high credit utilization.
Create a timeline for paying off your debt.
When debt starts to mount, many consumers focus on surviving month to month by paying down minimum amounts owed. This can have costly long-term consequences if you aren’t aware of your repayment schedule and how long it will take you to dig out of debt. The debt consolidation process will give you a clear repayment plan that helps you structure and schedule your debt reduction.
Reduce financial stress and avoid bankruptcy.
If you’re facing steep consequences of unpaid debts, such as high interest charges, collections actions and even potential bankruptcy, debt consolidation may be your ticket out of trouble. With a clear plan to repay your debts and rebuild your finances, you can rest easier at night while also satisfying different entities that may be taking aggressive actions to motivate your repayment.
Consolidating Debt: What To Expect From the Process
When the time is right for debt consolidation, you’ll need to create a plan for consolidating multiple debts into a single loan — or possibly a combination of loans, depending on the options available to you.
Different products and tools have their own benefits, limitations and criteria for approval. For consumers seeking out options for debt consolidation, common tools include:
Credit card balance transfers.
Some credit cards may offer balance transfers that let you consolidate credit card debt on a different credit card at a low or even 0% promotional rate. At 7 17 Credit Union, for example, our members can open a Visa® Platinum Rewards Credit Card that offers a 0% 12-month promotional rate. Although the balance transfer itself charges a one-time 3% fee, the interest savings on this debt consolidation option can be significant, and the promotional period can ease the pressure of trying to pay off your debt as quickly as possible.
A note loan is a fairly common, unsecured loan option guaranteed through a contract agreement between the borrower and the lender. Many banks and credit unions will offer note loans as an option for debt consolidation. These offer structured interest rates, monthly payments and repayment schedules so you can accurately plan your debt recovery.
Unlike unsecured note loans, a title-secured loan uses your car title as collateral in the event you’re unable to repay your debt consolidation loan. Depending on the amount you owe and/or the market value of your vehicle, a title-secured loan may be a viable option to consolidate some or all of your debt.
Other personal loans.
Depending on the financial institution you’re working with, other secured and unsecured loan options may be available to enable debt consolidation.
Home equity line of credit (HELOC).
If you have untapped equity in your home, a HELOC can offer a low-interest, flexible debt consolidation option that allows you to serve as your own lender with funds coming out of your existing home equity.
Why Should Saving and Investing be Treated as Expenses?
While it’s possible to consolidate your debt on your own, it often makes more sense to work with a debt counselor that can guide you through the process of reducing your debt obligations and maximizing your savings.
If you’re struggling to manage debt and/or debt consolidation on your own, an experienced professional can bring a number of benefits and advantages to your financial planning process. These benefits include:
- Guidance to help you find the best lending products at the lowest cost. Lower interest rates can lead to big savings when consolidating your debt. A debt counselor can help you research your options and identify the best lender and loan product to minimize your paid interest.
- Assistance in settling debts to reduce what you owe. In some cases, the debts you owe can be negotiated down with debtors in exchange for payment. Navigating these exchanges can be complex, though, and you’re more likely to strike a more favorable deal when working with a debt counselor.
- Advocacy to eliminate late fees and other charges incurred on your debt. In addition to reducing the total debt owed, a debt counselor can assist with convincing lenders to forgive additional fees tacked onto your debt due to late or missed payments.
- A commitment to helping you — not enriching the lender. When you try to negotiate on your own or work with a collection agency, you’re ultimately pitting yourself against an experienced entity with its own interests at heart. A debt counselor adds much-needed experience on your side and gives you an advocate that will work in your interest rather than trying to maximize their own revenues and profit.
Counseling to ensure your repayment plan is achievable.
Some consumers compound their debt problems by taking on aggressive repayment strategies they can’t maintain. In other cases, consumers may devise strategies for repayment that don’t take interest rates and other financial factors into account, resulting in inefficient repayments that cost more in interest than what they would have paid through a cost-optimized repayment strategy.
Turning Debt Consolidation Into a Financial Turning Point
Most consumers consider debt consolidation a necessary evil to correct past financial errors. While there’s no question that the debt resolution process is a situation any consumer should be eager to avoid, it’s also short-sighted to think of debt consolidation only in negative terms.
With the right approach and debt repayment plan — as well as a new financial plan to improve money management and avoid similar debt accrual in the future — debt consolidation can be a rock-bottom moment that fuels a significant turnaround in your financial habits and long-term financial wellness.
If you’re faced with mounting debt and need help getting it under control, don’t get down on yourself. Instead, use debt consolidation as your first step toward building the financial future you’ve always wanted for yourself. Take advantage of 7 17 Credit Union’s financial products and resources to help you consolidate debt and rebuild your finances.
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