Calculating debts
Understanding Personal & Debt Consolidation Loans
Debt
Personal Banking
11/6/2023
6 min. read
By: FCU Team
Are you making payments on multiple credit accounts or loans every month? Whether it’s credit cards, student loans, auto loans and/or medical debt, staying on top of different due dates, minimum payment amounts, and online portals can be a real hassle — not to mention make it more likely you’ll accidentally make late payments. In certain situations, taking out a debt consolidation loan may be a great option for you. But don’t get ahead of yourself just yet, as you have to first consider the pros and cons of taking out a debt consolidation loan.
The flexible use of funds is one advantage of personal loans. Another is the quick access to cash, as borrowers can sometimes get approved and receive the money within a couple days. This makes personal loans helpful for covering emergency costs when you don't have savings set aside.
Overall, while all debt consolidation loans are personal loans, not everyone uses a personal loan specifically for consolidating debts. But debt consolidation is considered one of the better uses of funds since it can save money on interest.
Unsecured personal loans are the most common type of debt consolidation loan. They don’t require any collateral, but that also means the interest rates are usually higher than secured loans. Approval is based primarily on your credit score and income. Secured debt consolidation loans allow you to use an asset you own, like your home, as collateral for the loan. This gives lenders greater assurance they’ll get repaid, since they can seize the collateral if you default. In return, secured loans offer lower interest rates than unsecured options.
One popular secured debt consolidation loan is a home equity loan or line of credit. If you have sufficient equity built up in your home, you can tap into it to pay off higher-interest debts. This can result in interest rate savings compared to credit card rates. Just keep in mind, failure to repay a home equity loan could put your home at risk of foreclosure.
For borrowers with multiple high-interest loans, a consolidated loan may be a good fit because it significantly helps streamline your finances into one loan with a single monthly payment, rather than trying to keep track of multiple bills, interest rates, and due dates. This can not only reduce your stress levels and help with bill organization, but also reduce your chances of missing a payment.
If you have a good credit score, chances are you will qualify for a debt consolidation loan at a lower interest rate than you currently have with your multiple creditors. If your credit score is less than ideal, your first step should be to determine how a debt consolidation loan will compare with your existing debts. Use a debt consolidation calculator to evaluate how your current debt payments will compare to what you would pay with a debt consolidation loan. Are the potential savings significant even if your new loan’s rate is slightly higher than some of your debts?
Tip: If you are not the most organized person in the world, consider setting up a direct payment to automatically withdraw funds from your account each month.
If your debt is small and it’s likely you can pay it off in 6-months to a year, you probably wouldn’t benefit much from a consolidation loan. If you have large debts that you cannot repay, especially if you are behind on mortgage payments and at risk of foreclosure, you may benefit from exploring longer-term personal loans or other debt relief options, which your financial institution can help you navigate.
Not sure where you fall on the spectrum? Our debt consolidation calculator can help you get a clear, complete picture of your debt and determine if a consolidation loan is the best course of action.
If money is tight, a standard debt consolidation loan may not be the best choice since you may not be able to make the monthly payments. Missing payments on a debt consolidation loan could mean damaging your credit score and increasing your debt even more. A good rule of thumb to go by is to look at your debt-to-income ratio. For example, if your debt is more than your current income, you might need a longer-term loan that would allow you to split your payments into more manageable amounts.
If the cause of your debt is largely due to overspending, a consolidation loan is probably not the solution to your financial woes. In fact, it can over give over-spenders the illusion that they have more money than they actually do since they only have one creditor to pay instead of multiple creditors. This can be a dangerous route if you know you’re prone to overspending. Instead, it’s a wise idea to examine your spending habits, take advantage of budgeting tools and resources, and create a budget to stick to.
To summarize, there are several benefits of a debt consolidation loan, including:
● One monthly payment at a fixed rate
● Lower payment when you work with a financial institution to set up loan terms that fit your budget
● Helps you stay organized on your finances when you don’t have to keep track of multiple bills, due dates, interest rates, etc.
● Lower interest rates depending on factors, such as your credit score
● Leverage home equity for a lower rate when you use a HELOC to consolidate debt
● Quicker debt payoff by paying more each month, as well as if you pay more than your monthly payment requires
● Improved credit score if payments are made on-time, as well as if you pay more than the monthly amount due
While there are many benefits to debt consolidation, there are also some drawbacks, such as:
● Potentially higher interest rates if your credit score is not in good shape, and you do not qualify for the most competitive interest rates
● No get-out-of-debt guarantees if you do not have your spending habits in check, you cannot make your monthly payments and/or your credit score needs improving
● Risk of overspending if under the illusion you are paying less because you have one monthly payment instead of several
● Check your credit score with the three major nationwide credit bureaus: Equifax, Experian and TransUnion. Next, fix any errors that may be negatively impacting your credit score.
● Use a debt consolidation calculator to get a complete picture of your debt and see how a debt consolidation loan might help save you money.
● Compile loan application documents, such as proof of employment, recent paystubs, W2 forms, tax returns, credit union/bank statements, two-months’ worth of statements for each credit card or loan you want to pay off, etc. There are other documents you will need, but collecting the aforementioned documents is a great way to get a head-start on the process.
● Request pay-off estimates from your lenders, which includes your current debt, as well as any accrued interest since your last payment.
● Research the best rates and talk to your financial institution. The team at your credit union or bank can help you navigate your options and find the loan terms that work for your budget.
● Submit your loan application – Florida Credit Union makes this process quick and easy with our online debt consolidation loan application process.
What is a Debt Consolidation Loan?
First things first; what exactly is a debt consolidation loan? In simplest terms, a debt consolidation loan is when you roll multiple debt accounts into a single loan. Why might this be a good option? For starters, it means fewer loans and payment due dates to keep track of. This lowers the chances of missing a payment, which can negatively impact your credit score. Plus, most debt consolidation loans come with a fixed interest rate, so you know exactly what you will need to pay every month.What is a Personal Loan?
A personal loan and a debt consolidation loan are the same — a loan taken out through a lender like a credit union or bank. While debt consolidation is one common use, personal loans can also fund other major expenses. People take out personal loans to cover medical procedures, home renovations, auto repairs, weddings, vacations, and more. The loan proceeds can generally be used for any legal purpose, with some exceptions. For example, some lenders don't allow funds to be used for educational expenses or investing.The flexible use of funds is one advantage of personal loans. Another is the quick access to cash, as borrowers can sometimes get approved and receive the money within a couple days. This makes personal loans helpful for covering emergency costs when you don't have savings set aside.
Overall, while all debt consolidation loans are personal loans, not everyone uses a personal loan specifically for consolidating debts. But debt consolidation is considered one of the better uses of funds since it can save money on interest.
Secured vs Unsecured Debt Consolidation Loans
When it comes to debt consolidation loans, there are two main options: unsecured personal loans and secured loans.Unsecured personal loans are the most common type of debt consolidation loan. They don’t require any collateral, but that also means the interest rates are usually higher than secured loans. Approval is based primarily on your credit score and income. Secured debt consolidation loans allow you to use an asset you own, like your home, as collateral for the loan. This gives lenders greater assurance they’ll get repaid, since they can seize the collateral if you default. In return, secured loans offer lower interest rates than unsecured options.
One popular secured debt consolidation loan is a home equity loan or line of credit. If you have sufficient equity built up in your home, you can tap into it to pay off higher-interest debts. This can result in interest rate savings compared to credit card rates. Just keep in mind, failure to repay a home equity loan could put your home at risk of foreclosure.
Is a Debt Consolidation Loan Right for Me?
Figuring out if debt consolidation is right for you is simpler than you think. Answer the questions below to see if a debt consolidation loan is best for you.Do you have several high-interest loans?
For borrowers with multiple high-interest loans, a consolidated loan may be a good fit because it significantly helps streamline your finances into one loan with a single monthly payment, rather than trying to keep track of multiple bills, interest rates, and due dates. This can not only reduce your stress levels and help with bill organization, but also reduce your chances of missing a payment.
Do you have a good credit score?
If you have a good credit score, chances are you will qualify for a debt consolidation loan at a lower interest rate than you currently have with your multiple creditors. If your credit score is less than ideal, your first step should be to determine how a debt consolidation loan will compare with your existing debts. Use a debt consolidation calculator to evaluate how your current debt payments will compare to what you would pay with a debt consolidation loan. Are the potential savings significant even if your new loan’s rate is slightly higher than some of your debts?
Tip: If you are not the most organized person in the world, consider setting up a direct payment to automatically withdraw funds from your account each month.
Is your debt small or is it overwhelming?
If your debt is small and it’s likely you can pay it off in 6-months to a year, you probably wouldn’t benefit much from a consolidation loan. If you have large debts that you cannot repay, especially if you are behind on mortgage payments and at risk of foreclosure, you may benefit from exploring longer-term personal loans or other debt relief options, which your financial institution can help you navigate.
Not sure where you fall on the spectrum? Our debt consolidation calculator can help you get a clear, complete picture of your debt and determine if a consolidation loan is the best course of action.
Is money tight right now?
If money is tight, a standard debt consolidation loan may not be the best choice since you may not be able to make the monthly payments. Missing payments on a debt consolidation loan could mean damaging your credit score and increasing your debt even more. A good rule of thumb to go by is to look at your debt-to-income ratio. For example, if your debt is more than your current income, you might need a longer-term loan that would allow you to split your payments into more manageable amounts.
Do you tend to overspend?
If the cause of your debt is largely due to overspending, a consolidation loan is probably not the solution to your financial woes. In fact, it can over give over-spenders the illusion that they have more money than they actually do since they only have one creditor to pay instead of multiple creditors. This can be a dangerous route if you know you’re prone to overspending. Instead, it’s a wise idea to examine your spending habits, take advantage of budgeting tools and resources, and create a budget to stick to.
Debt Consolidation Pros and Cons
Debt Consolidation Pros
To summarize, there are several benefits of a debt consolidation loan, including:
● One monthly payment at a fixed rate
● Lower payment when you work with a financial institution to set up loan terms that fit your budget
● Helps you stay organized on your finances when you don’t have to keep track of multiple bills, due dates, interest rates, etc.
● Lower interest rates depending on factors, such as your credit score
● Leverage home equity for a lower rate when you use a HELOC to consolidate debt
● Quicker debt payoff by paying more each month, as well as if you pay more than your monthly payment requires
● Improved credit score if payments are made on-time, as well as if you pay more than the monthly amount due
Debt Consolidation Cons
While there are many benefits to debt consolidation, there are also some drawbacks, such as:
● Potentially higher interest rates if your credit score is not in good shape, and you do not qualify for the most competitive interest rates
● No get-out-of-debt guarantees if you do not have your spending habits in check, you cannot make your monthly payments and/or your credit score needs improving
● Risk of overspending if under the illusion you are paying less because you have one monthly payment instead of several
How to Apply for a Debt Consolidation Loan
If you have determined that a debt consolidation loan is right for you, we have provided a straight-forward way for you to get started with the process.● Check your credit score with the three major nationwide credit bureaus: Equifax, Experian and TransUnion. Next, fix any errors that may be negatively impacting your credit score.
● Use a debt consolidation calculator to get a complete picture of your debt and see how a debt consolidation loan might help save you money.
● Compile loan application documents, such as proof of employment, recent paystubs, W2 forms, tax returns, credit union/bank statements, two-months’ worth of statements for each credit card or loan you want to pay off, etc. There are other documents you will need, but collecting the aforementioned documents is a great way to get a head-start on the process.
● Request pay-off estimates from your lenders, which includes your current debt, as well as any accrued interest since your last payment.
● Research the best rates and talk to your financial institution. The team at your credit union or bank can help you navigate your options and find the loan terms that work for your budget.
● Submit your loan application – Florida Credit Union makes this process quick and easy with our online debt consolidation loan application process.