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Frustrated by your finances? Before we dive into deciding whether consolidation loans are right for you in 2022, let’s look at what debt consolidation is. In a nutshell, debt consolidation is the process of paying off multiple existing debts with one new loan. There are loans marketed specifically as debt consolidation loans, though you can also use home equity loans and personal loans for debt consolidation. 

How does debt consolidation work? 

Debt consolidation starts by securing a new loan. You’ll use the money borrowed from your new loan to repay some (or all) of your existing debts. This process can streamline your debts since you’ll have one monthly bill to keep track of rather than several. Depending on the terms of your new loan, it could reduce your interest rate and total repayment costs, too.  

Debt consolidation has advantages, though it’s not the right option for everyone. There are several factors that can help determine whether consolidating loans is a good solution for you in 2021. 

Is debt consolidation wise? Is it right for me? 

Here are a few factors to weigh up when looking at whether debt consolidation makes sense for you:

  • Total interest costs— It may make sense to secure a consolidation loan if you qualify for a new loan at a lower interest rate than your current payments. In this case, you would save money on repayments overall. Be sure to read the fine print to make sure that the interest rate is lower, there aren’t hidden fees, and that it won’t make your repayment timeline substantially longer. 
  • Monthly payments— No one wants to struggle with monthly payments, and even if you have a handle on your monthly bills, sometimes things happen that put you in a tough spot. If you secure lower consolidation loan rates it could allow you to keep paying off your debt consistently while paying less each month.  
  • Complexity of repayment— When you consolidate multiple existing debts into one new loan it  means you only have one payment to keep track of instead of several. This may be easier to manage and could provide some financial and psychological relief from the stress of juggling multiple debts. Keep in mind that it’s important to factor in your financial plan here since you’ll want to make sure that you have a plan in place for any credit or funds that your consolidation loan frees up. 
  • Whether you would like to change loan servicers— If you don’t like your current loan servicers and are looking to make a change, debt consolidation gives you an opportunity to switch to a new lender to work with for future payments.  
  • Secured vs unsecured debt— If you’re considering a home equity loan, home equity line of credit (HELOC), or refinance loan to consolidate debt, you’ll want to be cognizant about whether you’re turning unsecured debt (such as a credit card debt) into secured debt. With secured debt, an asset—such as your house—acts as collateral and could be lost if you can’t make repayments. Conversely, unsecured debt isn’t tied to an asset so you aren’t usually at risk of losing your house (though your credit will take a hit if repayments aren’t made).  

Does debt consolidation affect your credit? 

Debt consolidation has the potential to raise your credit scores in the long term if you use it to pay off debt and you reliably make payments on time since you’ll be paying off debt on multiple accounts. It’s possible you’ll see a decline in your credit scores at first, though it’s likely to be a temporary dip that will repair as you start making repayments. 

If you’re deciding whether consolidation loans are right for your finances, It’s always worth talking to a trusted financial advisor or lender who can consider your personal financial situation and take all of the possible factors into consideration. Everyone’s financial situations are different, and it pays to speak to someone you trust who can look at your unique circumstances and help make the best decision for you. 

White River Credit Union is committed to supporting you with your finances, savings, and goals.

Visit our learning area for financial literacy webinars and more tools for financial health. If you would like help with debts and savings, reach out to us at any time; we’re always happy to help. 

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