Is Debt Consolidation Right For You?

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If you are tired of paying off multiple high-interest rate loans each month, consolidating all your monthly payments into one larger loan might be in your best financial interest. Whether you are trying to stick to a monthly budget or avoid bankruptcy, debt consolidation may be the right step toward gaining more financial freedom. 

Of course, not all loans are the same and specifics like duration, interest rates, and monthly payments can vary drastically between loans, so it’s important to understand all of these variables before you sign off on anything, especially when you are consolidating multiple loans into one.

As interest rates continue to rise, so does the amount of debt carried by American consumers. According to NerdWallet.com, the average american household with credit card debt is estimated to have nearly $7,000 in revolving balances that carry over from month-to-month. (1) Generally, debt consolidation can be used for unsecured debt, including credit cards, medical bills, personal loans, and payday loans, and can offer a flexible way to improve your financial freedom. Here are a few loan basics you should know before starting your own research:

Secured vs Unsecured Loans

Secured loans, such as a mortgage on a house or a car loan, require a pledge of collateral in order to make the loan secure. When you take out a mortgage on your home, for example, your house is used as collateral. Because the loan is secured by your collateral, these loans will often carry lower interest rates and lower monthly payments. The down side to a secured loan is that you put your collateral at risk and may lose it if you are unable to pay back the amount you owe.

Unsecured loans, on the other hand, do not require collateral and usually carry a higher interest rate which often results in higher monthly payments. If your credit is poor, you may have difficulty acquiring an unsecured loan. Since unsecured loans can be difficult to get approved for without great credit, credit cards that offer no interest sign up bonuses are often used as de facto unsecured loans. Be sure to read the fine print and understand the terms of these offers before you agree to them. For instance, in some cases you are required to pay off the total amount of the balance before the end of the no interest period or you will be charged back interest for the total duration of the loan. (2)

Fixed vs. Variable Rates Loans

Fixed rate loans means that the interest rate on the loan will never change, regardless of whether market interest rates change. This means that your monthly payment will be the same for the entire term of the loan.

Variable rate loans, however, will adjust the interest of the outstanding loan balance up or down based on changes in market interest rates. Current market climates will help to determine whether or not this type of loan is right for you. (2)

There are many companies that offer debt consolidation including SoFi, Upstart, Prosper, and LendingClub to name a few. Some lenders specialize in certain areas in order to tailor to specific needs such as fixed or variable interest rates, low credit rating or high-dollar loans. Taking a few minutes to research companies beforehand to find the one that best fits your needs can save you money in the long run. Watch out for gimmicks and high interest rates, especially, but be careful to consider each loan as whole package. Even with lower interest rates and lower monthly payment, depending on how long the loan goes, it is still possible to end up paying more than you originally owed.

1. https://www.nerdwallet.com/blog/average-credit-card-debt-household/

2. https://loans.usnews.com/debt-consolidation

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