Could Debt Consolidation Be Right For You?

Person using their phone and a calculator to do finances.

If you are in debt, chances are you’re working towards getting out of it. Debt can be a heavy burden and when it’s paid off, it can feel like a weight has been lifted off your shoulders. While there are various methods you can implement to help you become debt free, like budgeting and the snowball method. Today, we’d like to talk about another tool you might be considering – debt consolidation.

What is Debt Consolidation?

Debt consolidation refers to taking out a new loan to pay off other debts. Basically, all the smaller debts are combined into a single larger loan. It’s important to note that consolidating your debt doesn’t get rid of it, it just restructures it.

You might be thinking, “Well if I still owe all the money, how is debt consolidation helpful?”

If you have many debts with varying payment dates, interest rates and terms, restructuring them into a single loan with one payment date and interest rate may be easier to manage.

In addition to simplifying your budget each month, depending on your situation, consolidating debt could also get you more favorable terms on your debt. You may be able to get a lower interest rate, change your monthly payment amount, or get out of debt in less time.

Here are a few examples:

Let’s say you have several credit cards with a total balance of $10,000 and an average APR of 22% with a total minimum monthly payment of $400. It would take 34 months to pay it off, and you’d pay around $3,500 extra in interest alone.

Here’s what it might look like if your goal was to get out of debt in less time: You could roll those credit cards into one $10,000 home equity loan at an APR of 12% and a term of 24 months. You’d pay a little more each month with a monthly payment of $470.73. But in addition to getting out of debt sooner, you will have only paid around $1,297.63 in interest over the life of your loan.

If your goal was to lower your monthly payment, here’s what that could look like: You could opt for a $10,000 home equity loan with a longer term of 42 months that has a 12% APR, this would lower your monthly payment to $292.76. You would be paying $107.24 less each month and you would still only pay around $2,295.76 in interest.

These examples are for illustrative purposes only. They do not reflect current rates and terms available.

Things to Consider Before Debt Consolidation:

  • Debt consolidation is only effective when paired with budgeting and spending changes. You need to address why you went into debt and work hard to avoid taking on more.
  • Your ability to get a loan for debt consolidation will depend on your credit. If you have less than favorable credit, chances getting approved will be challenging and you may not be able to qualify for the lower rate you’d like.
  • Make sure to crunch the numbers. Will debt consolidation actually save you money? There may be closing costs, fees and rising interest rates that might make taking out a new loan actually more expensive than paying off your existing debt as is.

If you think debt consolidation is right for you, Pinnacle Bank is here to help. We offer home equity and personal loans to help you consolidate debt. For more information, contact your local branch to speak with a local lender today.