How many times have you looked over your monthly bills and just sighed?
Car loan, mortgage, credit cards, personal loans . . . so many payments every month. If only you could reduce the number of checks you write, and maybe even lower the overall amount you pay. But is that possible when interest rates seem to keep rising every couple of months?
Yes, it is. Depending on the kind of debt you have, there are reasons to consider talking to your bank about consolidating your debts, even in today’s higher-rate environment.
What is loan consolidation?
Loan consolidation is when you combine two or more loans into a single loan. Pretty simple… but super useful! The new loan may also offer a lower interest rate and a different payment structure, allowing you to pay a bit less every month.
Essentially, what you’re doing is taking out a new loan to pay off your existing debts, which could include credit card balances, vehicles, student loans, or other personal loans. This new loan closes those prior lines of debt – meaning it pays off the outstanding balances – and leaves you with fewer loans to pay.
To make this work, you may have to transfer debt from more than one creditor (financial institution) to a single lender.
Types of loans that can be consolidated
As we mentioned above, there are several kinds of debt you can consolidate, depending on your debt load and how you would like to restructure your current loans and payments.
Let’s define some typical different types of loans:
Benefits of loan consolidation
Of course, the primary benefit of consolidation is taking several payments and reducing them to a single payment. But that’s oversimplified. What else can loan consolidation do for you?
- Personal Consolidation Loans: These unsecured loans can be done through a bank, credit union, or fintech lender. You can consolidate several kinds of debt, such as personal loans, credit cards, and even medical bills.
- Balance Transfer Credit Cards: You might have a credit card that offers a balance transfer with a low (or even zero) interest rate for a specified period. If you consolidate several sky-high rate credit cards into a single balance transfer card, you can likely save money on interest charges.
- Home Equity Loans or Lines of Credit: If you’ve been a homeowner for a while, you may have built up enough equity to use a HELOC to consolidate your debt. A HELOC typically offers lower rates due to being a secured loan (using your home as collateral).
- Student Loan Consolidation: For individuals with multiple federal or private student loans, student loan consolidation allows them to combine their loans into a single loan with a new repayment term and interest rate.
- Potential Savings: The biggest benefit of consolidating your loans is that you could actually save money, both short- and long-term. Credit cards are high interest debt and paying them off in a lump sum with a consolidated loan has the potential to significantly lower your payments.
- Fixed Interest Rate: If variable-rate loans have you sweating every time interest rates go up, consolidating may offer you a fixed rate and help you protect against future rate hikes. Budgeting for loan payments is much easier and less stressful when you know exactly what you’re paying next month, and even next year.
- Cash Flow: When you consolidate, you can often negotiate a different payment structure. Even if you end up with a longer repayment term, the lower monthly payments leave you more cash for other expenses. That extra money can go towards basic necessities, paying off other debts, or saving up for a big-ticket purchase. Or, if your goal is to be debt-free, this can also help accelerate your progress.
- Better Credit Score: Navigating a loan consolidation and managing the payments in a timely manner can have a positive impact on your credit score. Improving your creditworthiness can help you get better credit terms on future loans.
- Loan Features: Depending on your financial institution, there might be added features available to you in a consolidated loan. Some loans may offer deferment options, which can become a valuable safety net should you run into financial hardship down the road.
- Ease the Stress: The anxiety of juggling several loans, and their payments, can wear anyone down after a while. Consolidating into a single, lower payment helps to ease some of the stress of not only multiple payments, but your overall financial burden. It gives you more time and energy to devote to other parts of your life.
Consolidating your debts into a single, potentially smaller payment can potentially make a lot of financial sense. Aside from the monthly savings, you might see a bump in your credit score, some extra cash in your pockets, and a better overall feeling about your long-term financial health.
If you think a loan consolidation might be beneficial for you, or if you have any questions about qualifying, we are here to help you through the entire process. Contact a Starion Bank personal banker or mortgage banker today to get started.
- Financial Habits: If you’re struggling to jumpstart some healthier financial habits, a debt consolidation may help. Taking a deep dive into your financial situation and looking ahead for several years to understand what’s in store can help you take stock and establish better short-term and long-term habits.