Find out if a debt consolidation loan is right for you

Debt. Sometimes it’s used to get what we want—a new car, a house. And sometimes it’s used to pay for what we have to—medical bills, home or auto repairs. No matter how it’s used, debt has become part of the fabric of our financial lives. Today, the average American owes about $29,800 in personal debt, not including a home mortgage. And outstanding credit card debt has climbed almost 20% from 10 years ago. With so many loans at varying interest rates, many people are looking to reduce debt and monthly payments. One option is consolidating debt.  

When you consolidate debt, you merge multiple loans and debt into one single payment. Debt consolidation can make paying off the debt easier, and it may reduce your overall monthly payments with one lower interest rate. If you’re considering a debt consolidation loan, read on for answers to some of the most common debt consolidation questions.  

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How much debt is too much?

First, let’s take a look at debt itself. Debt can be good—it has a positive effect on your credit score (as long as you keep up with payments), and mortgage loans can be a write-off on taxes. But having more debt than you can handle is never good. So how much debt is too much? Studies show that people with a debt–to-income ratio higher than 43% have trouble making their monthly payments. You can calculate your ratio with this formula: Divide your recurring monthly debt by your gross monthly income and multiply by 100. 

Some financial advisors suggest keeping your ratio around 35% while others say 36%-43% is manageable. However, once you reach a ratio of 43%, it becomes much more difficult to stay on top of payments. If your debt is to the point where you can no longer make your monthly payments and you can get a lower interest rate, then debt consolidation might be for you.  

Are consolidation loans worth it?

Whether consolidation loans are worth it depends on your personal spending habits and unique debt situation.   

If you have multiple loans along with high-interest credit card debt, a debt consolidation loan can allow you to merge this debt into one loan with, perhaps, a lower interest rate. If the loan won’t lower your overall payments or extends your debt over a long period of time so that you end up paying more money overall, developing a plan to spend down your debt is a better option.  

What’s the best way to consolidate debt?

How you choose to consolidate debt will depend on your stage of life and individual financial situation. If most of your debt is from credit cards, you may consider transferring all your balances to one credit card that’s offering zero-percent or low-interest credit transfers. A red flag—you’ll need to pay off the balance before the promotional rate is over, and buying more, rather than limiting spending, can get you into greater debt. Another option is to transfer the credit card debt to a lower-interest personal loan.  

One more way to consolidate debt is to take out a home equity loan to pay it off. You can do this only if you have enough equity in your house Also, it’s best if you already have your mortgage payments well under control. 

Always check the consolidation loan interest rate to be sure it’s something you can realistically afford—and double-check to see if, when and how much your interest rate will raise over time. Also, be sure to look at any fees associated with your debt consolidation loan. Sometimes when you pay off a loan earlier than your plan allows, you’ll get penalized with an early repayment fee, which may end up defeating the purpose.  

Understand why you have debt

No matter what you decide, it’s important to understand why you have debt. If it’s due to spending more than you earn, a debt consolidation loan won’t help in the long run. Instead, make a budget that will help you limit spending and pay off debt. If you need help, ask us—Greater Alliance partners with GreenPath Financial Wellness to help our members get out of debt and on a path to better financial security. 

Get help lowering your debt

If you’re thinking that consolidating debt is the best option for you, Greater Alliance can help. Ask us about our personal loan options, which can be used for Debt Consolidation, pay medical bills, emergencies, weddings and more. Contact us to get started today.