Is it time to consolidate your debt?

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Debt consolidation is exactly what it sounds like: Combining a series of smaller loans into one larger loan, often with a lower interest rate and a longer time period to pay it off. The benefits of debt consolidation are: you’ll make just one payment a month instead of several, your total monthly payment may be less, and you may pay less interest over the life of the loan (and/or pay off your debt sooner).

If you’re in debt, you are certainly not alone. Today, more and more Americans have student loan payments, credit card debt, business loans and other obligations. The average American household, in fact, has roughly $8,400 in credit card debt, and this figure has been on the rise for the last three decades.1 Student loan figures are even higher; the average household with student debt owes roughly $49,000.2

Does debt consolidation make sense for you?

Before you choose this option, do your research and take note of the following:

Compare your payments.
For debt consolidation to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If that’s not the case, consolidation may not be your best option.

Calculate your interest rate.
The interest rate on your consolidation loan should also be lower than the average of the interest rates on your individual loans. When this is the case, you save money and have a lower monthly payment. That’s a win-win.

Do the big-picture math.
If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won't actually be saving money over time—and it will take longer to pay off the debt in full—even though your monthly payment amount will be less.

The debt consolidation process

Once you’ve decided to explore a debt consolidation solution, there are many ways to proceed.

1. Credit card transfer: One method is to consolidate your debt on a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing information, such as the issuing bank, account number and approximate balance. Your credit card company may also provide convenience checks you can use to pay off your existing balances. Keep in mind, however, that there’s usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (e.g., six months).

2. HELOC: If you have equity in a home you own, consider a home equity line of credit (HELOC). This revolving line of credit is typically used for consolidating debt, home improvement expenses and other financial needs. You'll need to complete an application with your bank or mortgage lender and demonstrate your ability to make regular monthly payments. Your home will then be appraised to determine home value and available equity to calculate your potential line of credit. Interest rates, fees and terms for HELOCs vary, so you should shop around and compare lenders.

Note: If you use a home equity line of credit (HELOC) to consolidate your debts, the loan is secured by a lien on your home. If you default on the loan, the lender can technically foreclose on your home.

3. Personal loan: Some lenders offer loans specifically designed for debt consolidation. Once again, you'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity lines of credit. Depending on the amount you borrow, this type of loan may also require collateral on the loan (e.g., your car or bank account).

Learning to manage your debt is a step forward on the path to financial confidence. For additional tips on managing your finances sign up for the onUpdates newsletter, delivered twice per month.

1 “Here's how much the average US family has in credit card debt,” May 17, 2017, CNBC

2 “The Average American Has This Much Student-Loan Debt,” June 25, 2017, The Motley Fool

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