Is Debt Consolidation a Good Idea?

Pros and Cons of Consolidating Your Debt

Debt consolidation can make managing your debts easier. It can also save you a lot of money if you consolidate your debt to a lower interest rate. Debt consolidation involves getting a new loan to pay off smaller debts and then make a single payment on the new loan instead of numerous payments on the smaller loans. If your new loan has a lower interest rate, you can simplify your life, save money over time, and become debt-free faster. So, is debt consolidation a good idea? Check out these pros and cons.

When Debt Consolidation Is a Good Idea

Debt consolidation is a helpful financial tool if you can qualify for a new loan at a lower rate than your current debt, you are committed to paying back your new loan on time, and you avoid going more deeply into debt after consolidating. Here are some of the biggest pros to consolidating debt.

What Are the Benefits of Debt Consolidation?

There are many potential advantages of debt consolidation, including the following perks.

• Save money on interest payments. Debt consolidation loans often have lower interest rates than your current debt. For example, many credit cards charge over 20% interest, while cash-out refinances might have rates in the 5% to 6% range.
• Pay down debts faster. When you use the money you save on interest payments to pay extra on your debts, you get out of debt faster.
• Pay bills more easily. Consolidating your debts gives you one bill to pay on one due date, rather than several bills to pay on several dates.
• Make payment amounts predictable. Debt consolidation loans often have interest rates that are fixed (or that don't change as often as other variable loans), which means your monthly principal and interest payments won't change.

Benefits can vary depending on the method of debt consolidation. For example, the pros and cons of consolidating debt with a home equity loan are different from consolidating using a balance transfer credit card.

When Debt Consolidation Is a Bad Idea

Debt consolidation is not always the right choice for everyone. There can be costs and risks associated with this process that you need to think carefully about. Here are some of the biggest downsides.

What Are the Drawbacks of Debt Consolidation?

These are the biggest downsides of debt consolidation.

• Consolidation does not eliminate debts. A debt consolidation plan can help you manage your debts and save money on interest payments, but you're still responsible for paying your debts off in full.
• Consolidation loans have closing costs. Debt consolidation loans typically require you to pay closing costs, which will need to be factored into your budget and total costs.
• Missing payments can be risky. You'll want to make sure you can comfortably afford your new monthly payment, especially if your debt consolidation loan is secured by your home.
• You may be tempted to take on more debt. Consolidating your debt can make it easier to take on more debt. Evaluate your financial habits and avoid taking on more debt that could hinder your repayment progress.

A debt consolidation counselor or financial professional may be able to help you decide if debt consolidation is a good choice for you, as well as a mortgage professional. If you decide to use your home equity to consolidate debt, you should reach out to Freedom Mortgage as soon as you're ready.

Exploring Your Debt Consolidation Options

If you have high-interest debt, it's worth at least exploring the options you have for refinancing and consolidating. A home equity line of credit, for example, allows you to tap into the equity in your home and borrow at a very affordable rate because the loan is a secured loan.

You may be able to significantly reduce your costs, so it's worth talking with a mortgage professional to see what your options are.

Final Thoughts: Deciding to Consolidate Your Debt

Debt consolidation can be a strong first step to saving money and improving your financial situation if you have high-interest debt. While there are many ways to consolidate debt, tapping into home equity is often an affordable choice. Reach out to a mortgage loan officer today or contact us to apply for a HELOC to find out if consolidating debt using your equity is right for you.