When Does Debt Consolidation Make Sense?

Explore a popular strategy for money management and decide if debt consolidation is right for you.

Man and woman reviewing their finances together.

If your outstanding balances have outrageous terms, payments, fees, or interest rates, it might make sense to consolidate it all into a single, low-interest payment. Explore how debt consolidation works and what to do to take control of your finances.

How Does Debt Consolidation Work?

Put simply, debt consolidation rolls all your outstanding balances into a single loan, leaving you with one low-interest payment per month. This can make your financial life easier to keep track of, which may help you avoid missed payments and late fees and save you money.

How Do I Know When It’s Right?

Everyone is different, but there are a few situations when consolidation makes a whole lot of sense:

  1. Lower Interest Rates: Say you have outstanding balances on multiple credit cards with high interest rates; if you qualify for a personal loan with lower rate, you’d be better off securing that loan and using the funds to pay off your credit card balances. With a lower rate, you’d pay less in interest and could therefore put more toward the loan balance, helping you pay off your loan faster.
  2. Fixed Interest Rates: If some or all of your loans have variable interest rates, that can make predicting upcoming payments difficult. Not to mention, if rates are rising, so are your payments. In this case, it might make sense to convert your variable-rate balances to a fixed-rate loan, which has steady monthly payments for the life of the loan.
  3. Easier Payments: If your finances are currently spread out amongst multiple lenders with different interest rates, minimum payments, due dates, and/or terms, it can be easy to miss a payment, rack up interest, or get hit with late fees. Consolidating all your balances can help you avoid those costly mistakes and even reduce your overall monthly payments. Plus, you can help improve your credit score by making payments on time.

What Are My Best Options?

  • Personal Loans: Personal loans can provide low-rate financing that can be used for almost any purpose. Whether you want to use a personal loan to pay off your high-rate credit card balances, variable-rate student loans or other types of debt, a personal loan can help you consolidate with confidence, and it provides a fixed payment for easy budgeting.
  • Credit Card Balance Transfers: If most of your debt lives on credit cards, balance transfers can help you organize your finances and save on interest. A balance transfer moves your existing balance from one or multiple credit cards to another card. Explore balance transfers at UW Credit Union to see if they’re right for you.
  • Refinancing: Whether it’s your home, car or even your student loans, refinancing is an excellent way to save money on high-interest balances. Essentially, refinancing replaces your existing loan with a new loan, with a different rate or term that works better for your situation.

What’s the Difference Between Debt Consolidation and Refinancing?

Different lenders use different terminology, which can be confusing. At UW Credit Union, debt consolidation is a strategy to streamline your finances by combining multiple loans into a single loan. Refinancing is the option to replace your existing loan with a new loan that has a different rate or term. You may be able to consolidate and refinance at the same time – combine all your loans into one new loan. Ask us how to do this!

Are There Alternatives?

If you’re worried that even after consolidating you wouldn’t be able to afford the monthly payments, then you may want to consider credit counseling, debt settlement, or trying to work out a payment plan with your existing lenders.

Want to know more? UW Credit Union partners with GreenPath, a nonprofit organization that provides financial counseling services. Learn more about GreenPath.

Where Do I Start?

Schedule a phone call or in-person Credit Consultation with one of our Financial Specialists. Together, we’ll examine your accounts, analyze the interest rates and help you find the best path forward to accomplish your goals.

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