Debt Consolidation Loan Options
Debt consolidation loan options can help you meet financial goals and improve your overall finances—from getting out of debt to saving for a home. No matter what your financial goals, careful management of your debt is critical. Debt Consolidation is a common step people take to improve their financial situation.
What is Debt Consolidation?
Debt consolidation uses a new loan or credit card to pay off one or more existing loans, such as existing balances on credit cards with a higher interest rate.
Done properly, debt consolidation can help you pay down debt faster, build credit, reduce the amount of interest you pay over the life of a loan, and save for long-term goals such as buying a house. It can also simplify your bills by reducing the number of payments you have to make each month.
Before you accept a debt consolidation loan, it’s a good idea to make sure you can qualify for a new loan or line of credit that has a lower interest rate than your existing loans. If not, you might end up paying more interest in the long run.
Credit unions like SF Fire offer lower, competitive rates for loans and lines of credit, making them a good option to explore when you are considering consolidating debt. Check out this cardrates.com article written by Matt Walker about the financial health resources SF Fire offers to our community.
To learn more about loans or lines of credit, visit our Learning Center.
Loan Options for Debt Consolidation
You have different options for what sort of loan to use to pay off debt, depending on what works best for you. Options include fixed-rate personal loans, low interest rate credit cards, and Home Equity Lines of Credit (HELOCs).
Fixed-rate personal loan
A personal loan is an unsecured loan, which means you don’t need to provide collateral.
The advantages of a fixed-rate personal loan could include:
- Competitive rates that are lower than you find on many credit cards
- A fixed interest rate so you know what your monthly payment will be for the life of the loan, helping you budget
- No interest rate increases to worry about, as sometimes happens with a variable-rate loan such as a credit card or Home Equity Line of Credit
Low-Interest Rate Credit Card
If you qualify for a credit card that has a lower interest rate than what you are paying on your existing debt, transferring your debt to the new card can be a great option.
When researching your options for a new credit card, questions to ask yourself include:
- Are there balance transfer fees or annual fees? (SF Fire Credit Union’s Platinum Visa does not have either).
- Does the card have a fixed rate or a variable rate? If it varies, you might have to consider if you could handle higher payments if your interest rate increases.
- Is there a promotional rate? Sometimes you can find a credit card that offers a promotional rate as low as 0% for balance transfers for a set period of time. This can be a great option to help pay down debt if you can make aggressive payments – just be sure to check what your standard rate might become after the promotional period if you can’t pay off the entire balance in that time
Home Equity Line of Credit (HELOC)
Because a HELOC is tied to the equity in your home, it is often a great debt consolidation option because of low-interest rates.
Features of a HELOC with SF Fire Credit Union:
- Starts as low as 3.25%
- 10 years of interest-only minimum payments gives you flexibility with your cash flow and savings options, and the chance to pay down debt aggressively
Before you use your HELOC to pay off debt, it’s important to be sure you have a solid budget in place and can make the payments. Keep in mind that HELOCs usually have a variable interest rate so your payments could increase. If you run into trouble making payments on the HELOC, your home could be at stake.
Is Debt Consolidation Worth It?
It’s important to consider all the implications of a debt consolidation loan. As long as you can manage the monthly payments, debt consolidation can make a big difference in your financial situation:
Benefits of Debt Consolidation:
- Lower monthly payments, freeing up cash
- Save on interest over the life of the loan
- Simplify your bills by reducing your debt to one payment
But you need to consider a few factors to decide if debt consolidation is right for you.
Considerations Before Consolidating Debt:
- If you’re paying off higher interest-rate credit cards and freeing up those lines of credit, will you be tempted to use those cards again?
- Do you qualify for a lower interest rate than you have on the existing loans or credit cards?
If you're still not sure if debt consolidation is right for you, or if you have additional questions or concerns, you can speak with one of our Financial Service Representatives or check out these additional resources.
Looking for one-on-one assistance? We've partnered with industry-leading BALANCE to provide you with free access to expertly-crafted financial education and resources to help with your fiscal matters. Get confidential, no-cost financial counseling services.
Our Learning Center is a library of articles on a variety of financial topics, including building credit and managing money. Look for additional helpful articles to help you understand your options.