If you struggle to pay multiple credit card bills each month along with your student loan, your car loan and your mortgage, wrapping all those bills into one monthly payment may seem like a dream come true. But before you apply for a debt consolidation loan, you need to take steps to ensure that your financial plan doesn't backfire.
Debt consolidation tips
- Debt consolidation loan vs. home equity loan. If you own a home, you may be considering a home equity loan instead of a debt consolidation loan. While a home equity loan may offer you tax benefits since you can deduct your interest payments and will typically have a lower interest rate than debt consolidation loans, you are putting your home at risk if you are unable to make the payments. Make sure you have at least 20 percent or more in home equity before you tap into it to pay off your bills.
- Compare interest rates. While debt consolidation loans usually have a lower interest rate than a credit card, the rate could be higher than your car loan or student loan interest rates. Be careful that the interest rate you're quoted extends for the entire loan period also.
- Compare monthly payments. Add up all the payments you're making now and compare them to the estimated payment for your debt consolidation loan. While it's nice to make just one payment, be sure you can afford it comfortably before you commit to a debt consolidation loan.
- Check out overall interest payments. One way debt consolidation loan payments are lower than your credit card minimum payments is that the loan may be extended over 10 or 15 years. While that increases the affordability of the payment, realize that you're likely to be paying a lot more in interest over the life of the loan. Be sure that this is the only way you can get out of debt before opting for a new loan.
- Commit to stopping the debt cycle. Once you have paid off your credit cards and have only your debt consolidation loan payment, you may be tempted to spend again. If you run up your credit card bill again, you will just have increased your overall debt and will be in worse shape than when you started.
Can you qualify?
If you have credit problems, you may not qualify for a debt consolidation loan. Be sure you are making at least the minimum payment on time for every bill for a few months before you apply for a loan to increase your chances of a loan approval.
Complete the form on this page to see if a debt consolidation loan is right for you.