Understanding Debt Consolidation

If you’re juggling several credit card balances, loans, and monthly due dates, keeping track of everything can feel like a job of its own.

Debt consolidation may give you a simpler way to manage what you owe by combining eligible debts into one loan with one monthly payment and a defined payoff timeline.

What is Debt Consolidation and What is it Used For?

Debt consolidation restructures existing debt into a new loan by borrowing from one lender the amount needed to pay off multiple debts at once. In other words, debt consolidation combines different types of debt (like credit card debt, high-interest loans, auto loans, and/or medical debt) into a single loan that offers a fixed interest rate and payment, letting you know exactly when the loan will be paid off.

How Does Debt Consolidation Work?

The process typically starts by identifying the debts you want to consolidate and determining the total amount needed to pay them off. Your lender can work with you on this.

After you apply and are approved for a loan, the loan funds are used to pay off the eligible debts being consolidated. From that point forward, instead of making several separate payments each month, you make one payment on the new loan.

How Debt Consolidation Can Benefit You

• One Monthly Payment. When you consolidate your debt into one loan, you will only have one monthly payment to worry about. This can save time – instead of making multiple payments every month, you can make one payment and easily track your progress towards paying off your balance.

• Potential Interest Savings. Dependent on your credit history, you may qualify for a lower interest rate than what you currently have across your other debts. A better interest rate on debt can provide cost savings through lower monthly payments, less interest paid over the life of your loan, or a combination of both.

• A Clear Payoff Timeline. Consolidating your debt into one loan offers a set length of time for you to pay back the amount owed. That means you know how much your scheduled payment will be and when the loan is expected to be paid off. Unlike credit cards, your interest rate isn’t tied to current market conditions. You’ll have the same scheduled payment each month, based on a fixed interest rate throughout the life of the loan.

• Easier budgeting. A predictable payment can also make monthly budgeting simpler. Instead of planning for several different payments, you can account for one regular loan payment.

Things to Consider Before Consolidating Debt

Debt consolidation can be helpful, but make sure you assess the overall cost of repayment:

• Extended payment window. A longer repayment term may lower your monthly payment, but it could also mean paying more over time. It’s important to review the loan’s amortization schedule and total interest paid to understand the overall cost of repayment and how it compares with your existing debt.

• Credit impact. As underwriters review your loan application, they will complete a hard pull of your credit report. Hard inquiries can temporarily lower your credit score.

• Current interest rates. Comparing the interest rates on your existing debts with the rate on a potential new loan can help you understand how consolidation may affect your overall borrowing costs.

When Debt Consolidation Might Not Work

Your financial situation is unique to you, but in general, here are some general instances in which you should reflect before pursuing a debt consolidation loan.

• If your credit history makes it harder to qualify for favorable terms. Your credit profile can affect the interest rate and loan terms you’re offered. Less favorable terms may reduce some of the potential benefits of consolidating your debt.

• If you continue adding to existing balances. Consolidating debt can simplify repayment, but taking on new balances after consolidating can make it harder to make progress toward paying down your debt. Creating a realistic budget can help you manage your monthly payment and avoid rebuilding the balances you consolidated.

• If the new terms don’t support your goals. A lower monthly payment may be appealing, but it’s important to consider the overall cost of repayment, repayment timeline, and whether the new loan provides the structure or simplicity you’re looking for.

What To Know Before Consolidating Your Debt

Before applying, gather a few pieces of information so you can compare your current situation with a potential new loan.

1. Your Total Debt Balances. Your lender will need to understand how much money will be required to pay off your existing debts. Knowing the total balance of the debts you want to consolidate can help you determine how much you may need to borrow.

2. Your Credit Profile. Understanding your credit history can help you know what to expect when applying, since your credit profile may affect the interest rate and loan terms you’re offered.

3. Which Debts You Want to Consolidate. Not every balance needs to be included. Consider which debts you want to consolidate and how combining them would affect your monthly payments and overall repayment plan.

Compare Before You Decide

If you’re considering debt consolidation, compare your current balances, interest rates, monthly payments, and payoff timelines with the terms of a potential new loan.

Looking at those numbers side by side can help you determine whether consolidation could lower your costs, simplify your payments, or give you a clearer path to paying off your debt.

Considering Debt Consolidation? Peak Can Help. 

Debt consolidation can be a beneficial way to help you achieve your financial goals. If you’re considering consolidating your debt, a Peak Credit Union Personal Loan may be one option to explore.

Peak Personal Loans can be used for a variety of needs, including consolidating eligible debt into one fixed-rate loan with predictable monthly payments and a clear repayment period.

Explore Peak Personal Loans

Not ready to apply? Give us a call at (800) 258-3115 or stop by a Peak Credit Union branch. We can help you understand your options before you decide.