Consolidating & Paying Off Debt

 

Was one of your New Year’s Resolutions to get a handle on paying off your debt? GREAT! If you’re having a hard time getting started, we have some ideas.

Debt consolidation might be a good idea if you can get a lower interest rate than what you’re currently paying across your debts. This would reduce interest costs, lower your monthly payment(s), and/or help you pay off debt faster. Debt consolidation rolls multiple debts – typically high-interest loans and credit cards – into a single payment. There are multiple ways to consolidate and pay off debt – though, not without some risk. Here are a few options you may consider to consolidate your high-interest debt for savings and quicker payoff:

 

Debt consolidation loan – this is typically an unsecured personal loan, ideally with a lower Annual Percentage Rate (APR) than what you are paying on the other debts.

 

• The pros: A fixed interest rate means your monthly payment won’t change, and you can see the light at the end of the tunnel when you set the term for paying off the debt. Many lenders will also send the payoff payments to your other creditors on your behalf, saving you time and hassle. Lastly, consolidating your debts makes it easy to manage just one monthly payment, reducing the risk of your making late or missing payments on multiple loans.

 

• The cons: It may not make sense to consolidate certain debts if the interest rate is lower than what you might pay for a consolidation loan, so be sure to evaluate the cost savings compared to your convenience. Also be sure to ask your lender if there are any loan origination fees associated with your consolidation loan, and whether that negates the interest rate savings you would receive from consolidating your debts.

 

Balance transfer to a low-APR card – this tactic leverages a low-interest credit card to transfer your high-interest credit card balances over to.

 

• The pros: Members can save a ton on interest if you choose a low- or no-interest card to transfer to! But beware…

 

• The cons: Many cards will charge a balance transfer fee of 3-5% of the amount you transfer! This may not make the savings worth it. Something else to look out for is the 0% introductory period – based on how quickly you plan to payoff the balance, and how long the introductory period lasts, you may end up paying a much higher rate once the promo period ends and you’re still carrying a balance on the card.

 

Home equity loan or home equity line of credit – if you’re a homeowner, you may leverage the equity in your home and use it to pay off your other high-interest debts.

 

• The pros: These equity loans will typically offer a lower interest rate than what you might pay on an unsecured personal loan. Lender may also be more forgiving if you have a lower credit score, because these loans are secured by collateral (your home). You may also benefit from a longer repayment period, which could help make a lower monthly payment.

 

• The cons: The biggest risk here is that if you default on these types of loans, you could lose your home. You may also be required to get an appraisal to prove the amount of equity you have in your home to borrow against.

 

401(k) loan – if you have an employer-sponsored retirement account like a 401(k), you are typically able to take a loan from it. However, this should be something you consider as a last resort after you’re ruled out a balance transfer card and other types of loans.

 

• The pros: Typically these will have a lower interest rate than an unsecured loan. There is also no impact to your credit score and won’t show up on your credit report.

 

• The cons: The drawbacks can be significant – if you can’t repay, you’ll owe a hefty penalty plus taxes on the unpaid balance, leaving you struggling with more debt. It can reduce your retirement fund, slowing down your savings in the long run. And if you lost your job or quit, you may have to quickly pay back the loan.

 

Our Member Advocate Specialists are certified financial coaches, and are always happy to look at your financial picture to help you make the right choice for you. Cutting Edge offers consolidation loans, credit cards with no balance transfer fee, home equity lines of credit, and more! Contact us at 866-653-4392 or services@cuttingedgefcu.org to get started.