What Is Debt Consolidation & How Does It Work?
Debt consolidation can be a powerful tool for eliminating debt and avoiding high interest rates.
Debt consolidation refers to taking out one loan to pay off other loans. This is particularly useful to people who want to consolidate credit card debt when they have several high-interest balances.
For example, if you have two credit card balances, you can consolidate these balances by transferring them to a lower interest rate credit card.
The main benefit of debt consolidation is that you pay less interest on the new consolidated balance, which can save you hundreds of dollars each month. The money saved can be put toward paying-down the total loan amount.
The Credit Union of Southern California (CU SoCal) has been providing financial services to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County for over 60 years.
Call CU SoCal today and ask about low interest credit card consolidation!
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Why Consolidate Debt?
- Save money in the long run by taking advantage of a lower interest rate.
- Simplified payments made to one lender are easier to track.
- The savings you get from a lower interest rate could help you pay off debt quicker (as long as you contribute the additional savings to your payments).
- Preserve your credit score. If you’re struggling to pay high-interest debt, which results in making late payments or defaulting on payments, this negatively affects your credit.
If these benefits sound good to you, you may be a good candidate for low interest credit card consolidation or a loan to pay off credit card debt.
Types of Debt Consolidation
There are several types of debt consolidation strategies, including:
- Credit card balance transfer
- Personal loan
- Emergency loan
- Home equity loan
- Seeking help from a nonprofit credit counseling organization. (Nonprofit agencies offer counseling for free or at a minimal charge.)
Some people choose to borrow from their retirement savings, but this typically isn’t recommended because income tax must be paid on the amount withdrawn, and a 10% early withdrawal penalty is added if you do not meet the age requirement.
However, the recent CARES Act provides significant,
temporary relief from these provisions, including for individuals who experience adverse financial consequences as a result of COVID-19 related events. For more information, read the
bulletin from the U.S. Securities and Exchange Commission.
Debt Consolidation Loans
With a debt consolidation loan, you apply for a loan and, if approved, receive a sum of money to pay down or pay off your debt. The loan method chosen often depends on your unique situation, the amount of debt you have, the type of debt (i.e., student loan, mortgage, or car loan), and your credit score.
1) Home Equity Loan
A home equity loan is a lump-sum loan for a fixed amount that is secured against your home. Like your mortgage, you repay the loan in equal monthly payments, with interest, over a fixed-term.
With this option, you’ll readily have access to a large lump-sum to utilize however you want. CU SoCal can help you apply for a
Home Equity Loan.
2) Loans from Family and Friends
A loan from a family member or friend can be a quick and easy option to get the money you need, if you don’t have the credit history or collateral to qualify for other types of credit union or bank-funded loans.
While these types of loans are tempting, be sure that the terms of the loan and whether or not you are expected to pay interest on the amount you borrow are clearly stated in a document that you and the other people agree to and sign.
Additionally, before accepting a loan from a family member or friend, remember that these kinds of loans tend to have emotional attachments that could affect your relationship in the future—so be careful.
3) Personal/Emergency Loans
A
personal loan is a kind of low interest debt consolidation loan (also known as an unsecured loan, because it doesn’t require collateral or security) that anyone can apply for.
CU SoCal offers personal loan financing from $500 to $30,000, and a line of credit option for access to funds when you need it. At CU SoCal our personal loans feature no application fee, no prepayment penalty, and no funding fee.
Credit Card Balance Transfers
As mentioned earlier, a credit card balance transfer is an extremely useful strategy for low interest credit card consolidation.
If you have two or more credit card balances, you can consolidate credit card debt these by transferring the balance of each card to one lower interest rate credit card.
CU SoCal’s
Topaz Visa low-interest rate credit card is designed to help with debt consolidation. It offers 2% APR on balance transfers, and a low 2% transfer fee
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Zero percent interest maximizes your ability to reduce your debt each month because 100% of your payment reduces the principal amount owed. You can also use your Topaz Visa card for everyday purchases.
When Consolidating Debt Is the Right Move
You may be wondering, is debt consolidation a good idea?
If you answer “yes” to any of the following questions, then consolidating debt and a low interest debt consolidation loan could work for you:
- Do you have multiple credit cards with high balances?
- Do you have several high-interest-rate loans?
- Are you having trouble making monthly payments on your loans?
- Would you like to have one easy payment each month?
- Are you ready to pay off your loans and get out of debt?
Risks of Consolidating Debt
While there are many benefits to consolidating debt, there are also potential risks:
- Term Length: Credit card balance transfers typically include a timeframe during which the promotional transfer rate is effective. When the initial promotional rate expires, a higher interest rate will be used to calculate your payments. Be sure to check with lender on rate and terms so you can plan ahead.
- Transfer Fees: Debt consolidation credit cards may have a transfer fee based on the amount being transferred. Always consider the card’s fee and terms before you make the transfer.
- Over-Spending: Once debt is consolidated there may be the temptation to continue spending or spending more. The goal of consolidating debt is to focus on paying off debt in the timeframe of the low or introductory rate. Not paying on time or extending the term of agreement could cost you more in the long run.
Call Us To Learn More About Debt Consolidation
CU SoCal offers loans to pay off credit card debt, low interest credit card consolidation, and other debt consolidation products and services. Give us a call or stop by one of our branches to learn how we can help you!
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Payment factor based on maximum term.
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