If you have a lot of debt, you're not alone. Today, more and more Americans are burdened with credit card and loan payments. So whether you are trying to improve your money management, having difficulty making ends meet, want to lower your monthly loan payments, or just can't seem to keep up with all of your credit card bills, you may be looking for a way to make debt repayment easier. Debt consolidation may be the answer.
What is debt consolidation?
Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.
How do you consolidate your debts?
There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience checks that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (e.g., six months).
If you’re a homeowner, another option may be to apply for a home equity loan to pay off and consolidate your smaller individual debts. A home equity loan allows you to use a portion of your equity as collateral for the loan. The lender may require an appraisal to determine the value of your home to calculate the equity available for this type of loan. Click here to learn more about Waukesha State Bank home equity loans or to apply online.*
Last, some lenders offer loans specifically designed for debt consolidation. As with any loan, you'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan (e.g., your car or bank account).
Advantages of debt consolidation
- The monthly payment on a consolidation loan is usually substantially lower than the combined payments of smaller loans.
- Consolidation loans often offer lower interest rates.
- Consolidation makes bill paying easier since you have only one monthly payment, instead of many individual payments.
Disadvantages of debt consolidation
- If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the home equity loan.
- If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won't actually be saving any money over time, even though your monthly payments will be less.
- If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.
Should you consolidate your debts?
For debt consolidation to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans.
If you have any questions on consolidating debt, talk to a Personal Banker at any of our offices. We are always here to help.
Prepared by Broadridge Advisor Solutions Copyright 2023.
*Subject to credit approval. Other conditions or restrictions may apply.