What You Need to Know To Consolidate Debt
Did you know that only around 20 percent of Americans are free from debt of any kind? That means that 80 percent of Americans carry some kind of debt, according to the Pew Charitable Trusts. However, finding the right solutions to help you manage your debt can be tricky. Too many creditors and lenders can leave you with more questions about your debt than answers.
If your debt is getting out of control and you need help, you are not alone. There are many options that can help you gain control of your debt and get your life back. A common solution for handling debt is through debt consolidation loans. Debt consolidation can solve your credit issues, lower your monthly expenses, eliminate the stress of multiple monthly payments and give you control over your finances again.
Does debt consolidation sound like the solution you’ve been looking for? Greater Alliance is here to give you the answers to some frequently asked questions to get you started on the path to financial freedom once more.
What is a Debt Consolidation Loan?
A debt consolidation loan, or DCL, combines all your many debt payments into one. It’s used to pay off the balances on all your other accounts, and then make one manageable, monthly payment.
A DCL offers a lower interest rate than your current creditors, which can help you pay off your bills faster and save money that would normally get eaten as interest. Individuals who have many high-interest credit cards with high balances typically benefit the most from debt consolidation.
Greater Alliance allows you to apply online for a debt consolidation loan of up to $20,000 with flexible terms and no collateral required. In addition, you could receive up to $1,000 cash back from Greater Alliance when you refinance your personal or credit card debt with GAFCU from another institution.
What Types of Debt Consolidation Are Available?
There are four main ways to consolidate debt. These include home equity loans, credit card transfers, debt consolidation loans and personal loans. However, not all debt consolidation is created equal. Here is a brief explanation of different ways you can consolidate debt, and when it is best to use each.
Debt Consolidation Options
- Home equity loans. If you have built up equity in your home, you may be eligible for a home equity loan. Interest rates are usually lower on a home loan; however, home equity loans put your entire home at risk if you are unable to pay back the loan. Most people are not advised to take out a home equity loan as a debt consolidation loan.
- Credit Card Transfers. Credit card balance transfers move all your credit card balances onto one credit card with a low monthly interest rate. There is a caveat to take into consideration with credit card balance transfers: you’ll need an adequate credit limit on the card that takes on the accumulated balances.
- Personal loans. These loans used to consolidate debt have fixed payments over a set period of time. The interest rate charged depends upon your credit rating.
- Debt consolidation loans. Banks and credit unions offer these loans specifically for the purpose of consolidating and paying off your debt. These loans should offer a lower interest rate than what you are current paying creditors.
What Types of Debt Can Be Consolidated?
Most people have one or two main types of debt. The first is secured debt, which is a form of debt that comes secured in exchange for something, often called collateral. An example of secured debt would be a mortgage loan for a house or an auto loan for a car. Secured debt means that the creditors can repossess your collateral if the payments are not made.
The second category, called unsecured debt, is debt that does not require collateral. With unsecured debt, there is nothing that creditors can take away from you if you do not pay back your loans.
Typically, only unsecured debt can be consolidated. This unsecured debt might include student loans, medical bills, personal loans, credit cards, utilities and more. The most common debt used for loan consolidation, however, is credit card debt. Secured debt, such as home and auto loans, often cannot be consolidated.
Why Would I Want to Consolidate Debt?
There are many advantages to loan consolidation.
- A debt consolidation loan allows you to roll all of your loans into one monthly payment, which can help you avoid the dreaded fees for incorrect amounts or late penalties.
- Combining all your payments into one also allows you to better manage your payments. Greater Alliance Federal Credit Union allows clients to pick their own payment date, and members can set up recurring or one-time payments, or choose to have payments automatically transferred from their saving or checking accounts while setting up their loan.
- A debt consolidation loan also decreases your monthly payments by reducing your interest rate. With loan consolidation, you can pay off those high-interest credit cards and commit to a lower monthly interest rate. Greater Alliance Federal Credit Union offers interest rates as low as 5.74 percent APR.
- Since you are paying less in interest, consolidating debt gives you the potential to pay off your debt quicker than with your previous creditors. Lower interest rates from consolidating can save you loads of money, meaning that you can put your additional funds toward your debt faster than ever.
- Debt consolidation can also give your credit score a boost. Paying off all those open credit cards helps your credit score by increasing your available credit, or improving your credit utilization ratio, which is the amount you owe compared to the amount of credit you have. Paying off your credit cards in full opens your line of credit, and you should see a jump in your credit score after just a few months.
Overall, debt consolidation is a great choice for many individuals because it offers lower interest rates, manageable monthly payments and a quicker payment period.
Is Debt Consolidation a Good Option for Me?
There are both pros and cons to loan consolidation. Although many people are successful with a debt consolidation loan, debt consolidation is not the right option for everyone. A debt consolidation loan might be the right choice for you if you have:
- A steady source of income. A debt consolidation loan is not a quick fix. Keep in mind that debt consolidation rolled all of your payments into one single loan that still needs to be paid off. A debt consolidation loan usually takes three to five years to pay off, so your income should be steady enough to last the course of those years. Your income also needs to be stable enough to prove to your creditor that you can repay the loan.
- A thought-out repayment plan. You should only agree to a loan after you know that you can afford to pay it off, not before. A debt consolidation loan is not a payment plan; it is only a way to help you manage your debt. Having a well thought-out plan for repaying your debt prior to taking out a new loan is the best way to be successful with debt consolidation.
- Good spending habits. A debt consolidation loan can leave you feeling like you are free from debt, eliminating credit card and other monthly payments. If you pay off your credit cards in full using a consolidation loan, it might be tempting to look at all your available credit and get yourself into the same financial turmoil as before. For this reason, discipline and positive spending habits are crucial for the success of loan consolidation.
Does a debt consolidation loan sound like a good option for you? Apply for a consolidation loan today.
Debt consolidation might not be the best option for you if you have:
- Co-creditors. If you have co-creditors that are also responsible for your debt and you take out a DCL by yourself to pay it off, then you are taking full liability for the re-payment of that money.
- Poor spending habits. If you have poor spending habits and are prone to opening new credit cards after maxing out your old ones, then debt consolidation is not the right choice for you. Debt consolidation can increase your credit limit, but if not done correctly, you could find yourself in even more debt.
- A higher interest rate. The point of a debt consolidation loan is to decrease your interest rate and to have more manageable monthly payments. If your new debt consolidation loan is has a higher interest rate than what you currently owe, that debt consolidation loan is not the right fit for you. It is important to research your loan options to find the best choice for you.
Contact Greater Alliance Federal Credit Union to learn more about the loan consolidation options that are available.
As you can see, debt consolidation might not be for everyone. To see if loan consolidation is the best solution for you, Greater Alliance Federal Credit Union has partnered with GreenPath Financial Wellness to work with our members to eliminate credit card debt. GreenPath has been helping members find solutions for more than 50 years. Contact a GreenPath counselor for free financial counseling and discover what options are right for you.
Why Was My Application for a Debt Consolidation Loan Declined?
If you applied for a debt consolidation loan and were declined, it could signal a greater financial issue that should be addressed. Here are a few situations when a debt consolidation loan could be declined, and how you should handle each:
- Your credit score is too low. A poor credit score indicates poor spending habits and signals to lenders you are a high-risk borrower. Lenders are vary of individuals with a low credit score, and may deny your application for a consolidation loan or hike up your interest rate. Talk to a GreenPath Financial Counselor to find solutions to improve your credit score.
- You have too much debt. A lender may deny your loan application if they feel you have too much debt and will not be able to repay the loan. To work around this, you will likely need to pay off a portion of your debt before considering a new loan.
- You do not make enough money. When applying for a loan, creditors need proof that you will be able to repay the loan in full and on time. If your income is not high enough, creditors will doubt your ability to repay the loan and may deny your application. In this case, you may be better off with another debt solution over a debt consolidation loan.
- You cannot provide collateral. Collateral would only be required if you are trying to consolidate debt that is secured, which is not a type of debt that is frequently consolidated. However, some creditors may require collateral if you have a low credit score. This secures your debt by providing something that creditors can liquidate if you do not repay the loan, ensuring that they do not lose money.
- Your timeline of repayment is too long. Some lenders may only agree to a loan if you agree to pay off the loan on a short timeline. A prolonged payment period could be a discouraging factor for a lender. To address this, take a second look at the terms of your loan and see if you can repay the loan with a faster payment plan.
The best way to qualify for a debt consolidation loan is to take charge of your finances and pay off your debt before it gets too late. To find out if you are eligible for a debt consolidation loan, apply with GAFCU today. If you have been denied a debt consolidation loan, contact Greater Alliance Federal Credit Union to discover other financial solutions that may be available to you.
How Can I Get a Debt Consolidation Loan?
Debt consolidation loans are offered through banks, credit unions and online lending sites. Comparing lender’s interest rates, fees and payback period is important when deciding on a lender. Greater Alliance Federal Credit Union allows you to borrow any amount up to $20,000, and requires no collateral.
Before you decide to apply for a debt consolidation loan, think about your total debt and the amount you are currently paying. List your credit card and other monthly payments. What is your ability to pay off the loan each month?
Make sure the debt you are paying off is unsecured, as debt consolidation is usually geared toward unsecured debt.
Do your research on terms and interest rates before selecting a lender and taking out a loan. Make sure you speak with a trusted counselor who has your best interest in mind. Greater Alliance has partnered with GreenPath Financial counselors to offer members free financial counseling and assist them in finding the optimal financial plan for their needs.
Greater Alliance Federal Credit Union offers debt consolidation loans up to $20,000 with interest rates as low as 5.74 percent. Along with flexible terms and an easy, online application process, Greater Alliance can help you reduce your monthly payments and offers debt protection upon request. Greater Alliance Federal Credit Union, along with GreenPath Financial Resources, works together to find the best debt solution for you.
If you are ready to make your way out from under your mountain (or even a molehill) of debt, call us today. Greater Alliance Federal Credit Union has many resources available to assist you in finding your way out of debt. Apply for a debt consolidation loan today or call Greater Alliance Federal Credit Union to find the best financial solution for you.