Debt Consolidation Options

If you have credit card debt, student loans, medical bills, or any other kind of personal debt, it may seem overwhelming to think about paying off that debt. You are not the only person dealing with debt, and there are ways to start consolidating and paying off your debt so that it’s manageable and less stressful. 

The average American has more than $90,000 in personal debt, a journey of a thousand miles for most. But taking the first step on that journey is something you can do today by consolidating your debt.

Arkansas Federal Credit Union offers a variety of options for debt consolidation. Before opening a credit card or taking out a loan, you should consider all types of debt consolidation and decide on the best option to consolidate debt for you and your circumstances.

What Is Debt Consolidation?

Debt consolidation is combining multiple debt payments into a single payment. You can view debt consolidation as a way to rearrange your finances and debts into one simpler monthly payment instead of having to keep track of multiple bills and payments each month.

There are a lot of different ways you can consolidate your debt. Before starting your debt consolidation, you should consider all of your best options for debt consolidation and decide what is the best fit for you.

The most popular ways to consolidate debt are through personal loans, low-rate credit cards, and home equity loans. Each option has benefits and downsides that may make one option a better choice for your personal financial situation and debt consolidation goals.

Personal Loans for Debt Consolidation

A personal loan is a flexible loan. You get a single payment in a lump sum that you can use for almost anything. After receiving your lump sum, you repay your personal loan each month. These kinds of personal loans are often used for debt consolidation. 

Debt consolidation loans are personal loans used to pay off multiple debts and to consolidate several different bills into one monthly payment. A debt consolidation loan usually has a lower effective interest rate than other types of debt. Rather than juggling multiple credit cards, student loans, personal loans, etc., a personal loan for debt consolidation allows you to reduce your debt one payment at a time.

Benefits of Debt Consolidation Loans

Personal loans are good for debt consolidation for many reasons, but it’s important to do the research to know if they’re right for you. Every individual situation is unique, but these are some of the benefits of debt consolidation to consider when weighing whether to take out a personal loan: 

• Lower effective interest rates Credit cards typically have a high annual percentage rate. Personal loans tend to have lower interest rates. Depending on your debts, consolidating them into a personal loan may result in a lower overall interest rate, which can save you money as you pay off your debt. 
• Build good credit Although the initial hard request on your credit report when you apply for a personal loan may temporarily lower your credit score, a personal loan for debt consolidation can also result in long-term credit building. Credit scores are tabulated from many different factors, including your total available credit, credit usage, and payment history, so a debt consolidation loan alone won’t build good credit. Still, with on-time payments, a personal loan can help recover your credit, especially if you’ve been late paying back your other debts. 
• Repay existing debt One of the most obvious upsides to a personal loan for debt consolidation is that it condenses several sources of debt into one monthly payment. Combining your debt can potentially save you money by lowering your effective interest rate, but it also makes it easier to keep track and stay on top of your finances. 
• Set payment periods Debt consolidation loans simplify your finances by taking some of the mystery out of repaying your debts. With a personal loan for debt consolidation, you will know upfront how much your monthly payments will be and how long it will take to pay off. Credit Unions such as Arkansas Federal offer fixed-rate personal loans that make financial planning as easy as possible.

Downsides of Personal Loans 

Taking out a personal loan to consolidate debt isn’t right for everyone or every situation, and consumers should consider some of the potential downsides before making a decision: 

• Potential for higher interest Debt consolidation loans can have lower rates than other kinds of consumer debt, but it depends on your individual situation. If your current debts have a lower overall rate than a personal loan, then debt consolidation with a personal loan might not be the right strategy for you. 
• Potential for higher debt If you use your personal loan to pay off credit cards, you may be tempted to continue using those cards, which could lead to more debt. Because taking out a personal loan increases the amount of credit available to you, there’s a potential for ending up in more debt than you started with if you don’t use your credit responsibly. 

• Potential for harming credit If you miss payments on your personal loan, it could result in a lower credit score as well. Of all the factors that contribute to your credit report, payment history accounts for 35% of your total score, so don’t take out a personal loan unless you plan on making on-time payments. 
• Difficult to qualify Personal loans are unsecured loans, which means that they can be difficult to qualify for, especially if you don’t have the best credit history or insufficient income.
• Financial impact of life changes You should consider your job security and future plans. If you plan on changing careers or expect to make a significant life change, you should consider those factors, as your finances may shift.

Low-Rate Credit Cards for Debt Consolidation

A low-rate credit card is a credit card with a lower interest rate than traditional credit cards. Using a low-rate credit card for debt consolidation can make it easier for you to pay off your debt faster because you will have a lower interest rate each month and can pay more toward your principal debt each month. 

Benefits of Low-Rate Credit Cards

• Simpler payments Consolidating all of your debts onto a low-rate credit card reduces your monthly payments. With one payment, it’ll be easier to keep track of your payment debts and amounts, so you’re less likely to miss a payment.
• Savings Using a low-rate credit card means you can pay off your higher-interest debt quickly and avoid high-interest payments while only paying the lower interest rate of your low-rate credit card.
• Low rates and fees Arkansas Federal’s low-rate credit card has one of the lowest rates in the country, and it comes with no annual fee and no over-limit fee. 

Downsides of Low-Rate Credit Cards

• An open line of credit A low-rate credit card is a new line of credit. Even though it’s intended to pay off your existing debts, you’ll have to be careful not to overspend and add to your debt. If you’re worried about your spending, considering other debt consolidation options might be a good idea.

Home Equity Loans for Debt Consolidation

A home equity loan uses the value of your home as collateral for your loan. The amount of money you can get from a home equity loan is based on the current value of your home and the amount you still owe on your mortgage. 

Benefits of Home Equity Loans

• Single payment Keeping track of multiple payments to different places can be difficult and time-consuming. A home equity loan allows you to streamline your payments into one place by allowing you to pay off your other debts at once and only continue to pay off your home equity loan.
• Saving money Home equity loans typically have lower interest rates than other loans or types of debt. By using a home equity loan to pay off your debt, you can save money on interest payments over the life of your loan.
• Lower monthly payments Home equity loans traditionally have longer repayment periods than other types of loans. With a longer repayment period, you’ll be paying off the loan longer, but your monthly payments will be lower than other loans.
• Fixed interest rate Typically, home equity loans have fixed interest rates, which means that your payment won’t change over the life of the loan. A fixed-rate makes it easier to stick to your monthly budget because you can be confident how much your loan payment will be each month. 
• Easier to qualify Home equity loans use your home as collateral, which makes them easier to qualify for. If your credit history isn’t great, it may be easier for you to get a home equity loan than an unsecured loan.

Downsides of Home Equity Loans

• Collateral Unlike other debt consolidation options, a home equity loan requires your home as collateral. If you default on your home equity loan, you could lose your home. If you’re worried that you might struggle to make your payments, a home equity loan might not be the best debt consolidation option for you.
• Length of payments Depending on how long you’ve been paying off your debts, consolidating your debts into another loan could leave you paying off more interest than you would if you keep your separate payments.
• Fees Home equity loans can come with fees that other types of loans don’t have, such as origination fees. It’s important to pay attention to these fees because they could decrease your savings from consolidating your debt.
• Potential for harming credit Combining your debt under a home equity loan can free up your existing credit cards to allow you to spend more. If you’re not careful, you could end up deeper in debt than before you took out the loan.

Home Equity Loans vs. HELOCs

HELOCs are another loan consolidation option that you may have heard of. HELOCs are relatively similar to home equity loans, but there are a few important differences.

Home equity loans and HELOCs use your home as collateral and the equity you have in your home as the basis for your payment. The most important difference is that while a home equity loan is a single lump sum payment with a fixed interest rate, a HELOC is an open line of credit that allows you to draw money as you need.

HELOCs can offer flexibility with your money, but they can also be risky because it’s a new line of credit that has the potential to add to your debt.

What’s the Best Option for Debt Consolidation? 

Debt is a suffocating weight on many Americans’ shoulders. It may feel like an elephant sitting on your chest, but it doesn’t have to stay that way. By consolidating debt, you can regain ownership of your finances and get control of your monthly payments, one bite at a time. 

Your personal credit history affects what loans you can qualify for and how much you can borrow. If you have good credit, this is great news! Arkansas Federal Credit Union calculates loan eligibility by evaluating your financial history, credit score, and current income.

Arkansas Federal Credit Union offers its members competitive fixed-rates on personal loans, home equity loans, low-interest rate credit cards, and a full range of financial services. Take advantage of our personal dedication to our members and explore your options to find the best solution for your unique situation.
Contact us today at 800.456.3000 or visit one of our local branches to learn more about our debt consolidation options and how they can fit your needs.