Learn how to get out of debt: Debt consolidation

If you are looking to reduce your monthly payments, debt consolidation might be a good choice. But is it right?

Consolidating debt can be a good option for those who are struggling to pay multiple monthly bills.

“Debt Consolidation is basically taking multiple loans and putting them together so that you only have one monthly payment,” says Daniel Lawler (a Branch Team Leader at Regions Bank).

In theory, consolidating your debt will reduce your monthly payment and lower your interest expense. Lawler states that consolidation of debt is an option for those who are struggling to pay their bills, have too many, or don’t have sufficient cash flow.

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Where to start

Lawler recommends that you gather all of your debts and calculate the total amount owed. Use the Regions Debt Consolidation Calculator for a quick estimate of how much you could reduce your monthly payment.

For home equity loans, you will need to collect the last two years’ tax returns and information about homeowner’s insurance. You should also gather your financial advisor’s contact information.

Credit Cards

If you don’t have the ability to leverage your home equity, there are many credit cards that offer zero percent balance transfers rates. This can allow you to get a new credit line, transfer all of the balances from other cards to it and not pay any interest for the initial promotional period.

Make sure that you have enough funds to repay your transferred balances by the end of the promotional period. After this period expires, the interest rates on the transferred balances are likely to rise significantly and may be more than the rates you were charged before. If you are considering going this route, be sure to check whether balance transfers are subjected to a balance fee or if any restrictions apply.

Personal Loan

A personal loan can be secured or unsecured. The collateral requirement is the main difference between an unsecured and secured loan. Secured loans can use collateral, such as an owner vehicle or home, to increase their rate. Unsecured loans don’t need collateral. The downside to secured debt consolidation is that your collateral could be lost if the loan is not paid on time.

Staying on track after consolidating your debts

Consolidating debt is a good idea. You should create a monthly budget to keep your spending under control. Lawler warns against racking up your card balances again. Lawler warns that you shouldn’t immediately close down your cards. You need to determine which route will allow you to achieve your financial goals, while building your credit score.

If you feel it is sensible to keep your cards open, don’t use them too often. Also, try to not have more than 30% debt relative to the limits of each card.

Lawler states, “Also, if possible, make more than your minimum loan payment.” “Even just a little bit more every month can reduce the interest you’ll be paying.”

Consolidating your debt may help to reduce the burden. Make sure to research all your options and compare the costs of each option to decide if consolidation is right for yourself.

Home Equity Loans/Lines of Credit

A home equity loan, or line of credit, can be a great way to consolidate your debt. However, you will have to mortgage your home. If you don’t make your payments in time, fail your Homeowner’s Insurance, and/or pay your taxes on time, your house could be lost.

Lawler says that home equity loans or lines of credit have generally lower interest rates than personal loans, secured loans, and most credit card cards. You may be able, if you have sufficient equity to repay all of your bills and have only one monthly payment. Before you decide to mortgage your home if you have difficulty paying your debts.

As an example, let’s say you have $20,000 in credit card debt and student loans and auto loans. Your minimum monthly payments for these three debts amounts to $900. These individual debts can be eliminated if you open a home equity loan of $20,000 or a credit line, and you use the money to pay them all. Monthly payments of $387 will be due if the loan has a term of 60 months at a rate of 6%. You would see a drop in your monthly payments of nearly 60% in this scenario.

Consolidating debt can result in longer repayment periods, higher interest rates or additional costs. You may end up paying more over the term of the loan. Before you decide which option is best for your needs, make sure you calculate the total cost in each scenario.