Debt Consolidation

Is a Debt Consolidation Loan Right for You?

Managing multiple sources of high-interest debt can be frustrating and overwhelming. Consolidating your debt gives you one simple loan, one low rate, one easy payment.

How does it work?

With debt consolidation, you use the funds from a low-interest signature loan to pay off debts from multiple lenders. Debt consolidation can help make your high-interest debts more manageable, more affordable, and easier to pay off since you now have one payment, once a month.

Is it right for you?

While this is a sound strategy in certain circumstances, consolidating your debt is not always the right choice for paying down your debt.

We believe you should always make informed financial decisions that best benefit your financial needs and goals. Keep reading to find out if consolidating your debt with SF Fire Credit Union is right for you.

When Debt Consolidation Makes Sense

If you are trying to manage moderate, but not severe, debt and want to simplify your payments each month, debt consolidation might be right for you.

Benefits of debt-consolidation:

• A lower-interest rate: you will likely pay less in interest and more towards your principle balance.
• A locked-in rate: your payments will be the same each month for the life of the loan, making it easier to budget and plan.
• Lower monthly payments: the extra funds each month could be put towards savings, travel, or retirement planning.
• Repayment timeline: as long as you make the payments each month, you'll know exactly when the debt will be paid off.

When Debt Consolidation Doesn't Make Sense

While consolidating your debt with a signature loan is often a sound financial strategy, there are certain circumstances when it may not be the right choice for you.

You can't get a lower interest rate

If you can't qualify for a rate that's lower than what you're currently paying, debt consolidation may not be right for you. You'll wind up paying more in interest than you would if you just kept your current debt structure.

You qualify for a promotional 0% APR balance transfer card

Certain credit cards off an introductory 0% APR for balance transfers. This allows you to transfer your debt to one card and pay zero interest for a limit time.

There are some things to consider:

• Your debt may exceed the transfer limit, or not be eligible for transfer at all.
• Card may charge a balance transfer fee (usually 3% of the total amount transferred).
• The 0% APR is introductory and will change. This typically happens after 12-24 months, and the new APR is generally much higher than that of a signature loan.
• If you don't think you can pay off the debt during the introductory period, you might want to consider other options.

Your spending habits aren't under control

Before you consolidate, check your budget and ask yourself:

• Can I afford these payments?
  • Even though consolidating your debt with a signature loan generally results in lower monthly payments, you still need to be sure they are within your means.
• Will I be tempted to use my credit cards?
  • Just because the balances on your credit cards are paid off, you should still be careful about using them too often. This will only rack up more debt, and put you back in the position you started from.
• FICO (a company central to the calculation of credit scores) is changing how they treat personal loans. If you use a personal loan to pay off credit card debt, but then amass more debt by using those credit cards, there may be negative consequences for your scores.