Take Control of Your Finances: Learn About Debt Consolidation, Balance Transfers and Personal Loans
Debt Feel Out of Control? Compare These Consolidation Options
Compare balance transfers, personal loans, home equity loans and lines of credit to find a repayment option that fits your needs.
Key takeaways:
- A balance transfer may offer a low or 0% promotional APR, but you’ll need a plan to pay down the balance before the introductory period ends.
- A fixed-rate personal loan can provide predictable monthly payments and a defined repayment schedule.
- If you own a home, a home equity loan provides a lump sum while a home equity line of credit lets you borrow as needed, using your home as collateral.
If you’re carrying multiple forms of debt, it can be hard to stay on top of due dates and interest rates, not to mention the amounts you owe and the interest you’re paying.
If the whole effort has started feeling like a juggling act or a game of Whack-a-Mole, you’re not alone. If you’re ready to take charge of your financial health, debt consolidation could be the answer.
What is debt consolidation?
Debt consolidation doesn’t erase what you owe. It changes how you repay it. If you qualify for a lower rate and account for any fees, consolidation may reduce your total interest or help you pay off debt sooner. Combining payments can also make your monthly obligations easier to track.
Will consolidating debt save me money?
Debt consolidation may save you money if you qualify for better terms, follow your repayment plan and avoid taking on additional debt.
Making payments on time and avoiding new debt are important to making consolidation work. A longer repayment term may lower your monthly payment, but it could reduce or eliminate your overall savings.
Debt consolidation strategies have different advantages and drawbacks, depending on your situation. Here are tips on how to choose the plan that’s the right fit for you.
Option #1: Balance transfer credit card
If you qualify for a balance transfer credit card with a lower APR, you may be able to combine multiple credit card balances on one card. Some cards offer a 0% or reduced promotional APR for a limited time, giving you an opportunity to pay down the transferred balance with less interest.
Advantages
- Eliminate or reduce interest: Depending on the offer you qualify for, you may pay less interest on the transferred balance during the promotional period.
- Consolidation: Combine multiple credit card balances into one simple payment.
- Promotional period: A balance transfer credit card is most beneficial if you pay off the balance during the no- or low-interest promotional period.
Disadvantages
- Fees: Balance transfer fees may apply. 3-5% of the amount to be transferred is typical.
- Limited promotional period: The promotional APR will expire. Check what the regular APR will be and make a plan to pay down the balance before the introductory period ends.
- Credit limit: The credit limit on the balance transfer credit card may not be high enough to cover all balances you want to transfer.
- Hard inquiry: Applying for new credit usually results in a hard inquiry on your credit report, which stays on your report for two years and usually lowers your credit score by a few points for a short time.
A balance transfer may be worth considering if you qualify for favorable terms and have a realistic plan to pay down the balance before the promotional period ends.
Option #2: Personal loan
Personal loans are often unsecured, which means they don’t require collateral. You can use one to combine multiple debts into a single monthly payment. Many personal loans also have fixed interest rates.
On average, personal loans have lower interest rates than credit cards, so consolidating credit card debt into a fixed-rate personal loan may save you money over the loan’s lifetime. Personal loans also have a defined payment term, giving you a clear deadline to pay off debt, unlike a balance transfer.
Advantages
- Predictable payments: With a fixed-rate personal loan, you’ll pay the same amount each month over the loan’s duration — no fluctuations to budget for.
- Fixed payoff date: When you’re approved for a personal loan, it comes with a defined repayment schedule, which makes it easy to budget.
- Lower rate: Depending on your credit profile, a personal loan could offer a lower rate than high-interest credit cards.
- Consistent loan terms: Your approved rate and repayment schedule aren't based on a temporary promotional period.
Disadvantages
- Rate depends on your qualifications: The interest rate you receive will depend on your credit profile and other factors.
- Fees: Origination or other fees may apply.
- Longer repayment: If you choose a longer repayment term, it can reduce the monthly payment but increase the overall interest paid.
Consider a personal loan if you want a predictable repayment schedule and can qualify for a rate that makes financial sense compared with your current debts.
Option #3: Home equity loan or line of credit
If you own a home, you may be able to use a home equity loan or home equity line of credit, also called a HELOC, to consolidate debt. Home equity is the difference between your home’s value and the amount you owe on it. Because these options use your home as collateral, it’s important to compare the potential savings with the costs and risks.
Advantages
- Large loan limits: If you have a lot of equity in your home, the amount you can borrow to consolidate debt could be higher than with a balance transfer or personal loan.
- Lower interest rates: HELOCs and home equity loans typically have lower interest rates than other consolidation options.
- Secured by your home: Because a HELOC or home equity loan uses your home as collateral, qualification works differently than it does for unsecured credit.
Disadvantages
- Potential fees: These could include fees for application, origination, appraisal and early termination.
- Home as collateral: If you fall behind on payments or can't repay the loan, you could risk losing your home through foreclosure.
- Minimum loan requirements: You might be required to borrow more than you need.
How to choose the right debt consolidation option
When it comes to debt repayment strategies, what works best for you will depend on:
Current debt
Look at your current APRs and how many separate debts you have. Is all your debt credit card balances, or do you have other types of debt?
If you want to combine credit card balances with other types of debt, a personal loan may be worth considering.
Credit
Your credit score and credit profile can affect whether you qualify and what interest rate you receive. Compare the terms you’re offered rather than relying on the advertised rate.
Payoff timeline
If you opt for a credit card balance transfer, make sure you can repay the debt during the promotional period. When the period ends, you could end up with a higher APR and more interest payments than before.
If that's not realistic, a fixed-term personal loan with a lower rate (or a HELOC or home equity loan if you own a home) could be an easier path toward becoming debt-free.
Total cost
The goal of debt consolidation is to make repayment more manageable without increasing what you pay overall. When comparing a balance transfer, personal loan, home equity loan or HELOC, look at:
- Interest rate/APR, and whether fixed or variable
- Upfront fees
- Monthly payment
- Repayment term
- Total amount you’ll pay
Use a debt consolidation calculator to estimate your monthly payment, total interest and overall repayment cost.
Look for a debt consolidation option that:
- Fits your current budget
- Makes repayment easier to manage
- Reduces your total interest and fees, when possible
Make the numbers work for you before making the move
Before choosing an option, gather your current balances, APRs, minimum payments and remaining repayment terms. Then compare those numbers with the balance transfer, personal loan or home equity offers available to you.
The goal isn’t only to simplify your payments today. It’s to choose a repayment plan you can realistically follow until the debt is paid off.
Not sure which debt consolidation option fits your situation? A Northwest banker can help you compare your choices and understand the potential costs. Visit a financial center near you to start the conversation.
Debt consolidation combines multiple debts into one payment, often through a balance transfer, personal loan, home equity loan or home equity line of credit. Depending on the option and the terms you qualify for, consolidation may also lower the interest you pay.