How Does a Debt Consolidation Loan Work?
Financial freedom is something to aspire to, but debt can get in the way. If you’re looking for a way to get your debts under control and paid off quicker, debt consolidation can be a great option for managing debts. This allows you to combine your debts into one loan and get more favorable terms like lower interest rates and monthly payments.
CCCU is sharing some consolidation options that you should consider:
1. Debt consolidation loan
Depending on your current credit portfolio, you may be approved for $5,000- $50,000 worth of consolidated debt and can receive a loan from one to ten years with a fixed term. Once you’re approved, you’ll begin paying the new lender during the loan period.
To find the best loan option, you should carefully compare the loan terms between different lenders.
2. Credit card balance transfer
A balance transfer can help you streamline your credit card debts and minimize your interest rates. Like a debt consolidation loan, a balance transfer credit card combines all your debt into one loan. The difference is that the loan is a credit card, ideally with a lower interest rate.
With balance transfer credit cards, customers are typically given a 0% APR introductory period for 12 to 21 months. If you can afford to pay off your balance transfer during the introductory period quickly, this can be a great option for you to pay off your debts and save thousands of dollars in interest rates.
3. Using your home equity
Tapping into your home’s equity is another option to help pay off your debts. This option is also popular due to its low-interest rate offers, as lenders use your home as the collateral for the loan.
Many lenders allow you to borrow a maximum of 85% of your home’s equity. If the value of your home equity is lower than your debt, you may need to look for another option, like a debt consolidation loan or balance transfer credit card.
Is debt consolidation a smart financial solution?
Before you move forward, you should understand that consolidating your debt does not completely erase your debt. Here are some tips that can help you decide whether you should pursue debt consolidation:
With a proper system in place, like establishing healthy spending habits, building an emergency fund, and being on top of your monthly budget, you will be on your way to becoming debt-free. For additional money tips and resources, check out CCCU’s library dedicated to managing debt.