This debt consolidation guide is intended for anyone who wants to bring their debt payments under control but unsure of the available options.
In this debt consolidation guide, we’ll dig into four key areas:
- What is debt consolidation?
- When should you consider debt consolidation?
- What are the various ways you can consolidate debt
- Do I qualify for debt consolidation
Let’s get started.
Debt consolidation: what is it?
Debt consolidation is the term used to describe combining multiple debt obligations into a single payment. Debt consolidation can reduce stress while helping to tackle debt repayment, and there are several options available. We’ll start by looking at some of the key advantages and disadvantages of debt consolidation.
Common debt consolidation reasons include:
- You are interested in saving money by lowering the interest rates you’re paying on current debt. Eliminating high interest rates can save you hundreds or even thousands of dollars throughout. Whether you have credit card debt or loans such as a car or personal bank loan, reducing your interest helps you pay off the principal sooner, saving you money in the process. Some credit card interest rates can reach into the mid-20s. Debt consolidation refinancing can offer interest rates as low as 3%
- You want to simplify managing your money with a single monthly payment instead of multiple payments across different dates each month. No more struggling to remember, and budget, for several bills or due dates with differing amounts. Making one payment on all your debts is arguably one of the most popular reasons for considering consolidation. One payment also reduces the chances of missing payments that can harm your credit rating.
- Lower monthly payments. Debt consolidation can lower your monthly payments by extending the length of your loan. Spreading your debt over a longer repayment time frame decreases the amount you have to pay each month.
Different ways to consolidate debt
Debt consolidation offers a number of traditional options.
Often referred to as “credit card refinancing,” a balance transfer allows you to move your current debts to a no-interest credit card. Specific promotions allow borrowers to benefit from an introductory period of zero interest. The introductory period is usually between 1 and 1.5 years, at which time the interest rates jump.
You’ll need good to excellent credit to qualify for most zero-interest-rate credit card promotions. To benefit, you’ll have to pay off your debt within the introductory period. Remember, any remaining balance left on your card will be charged standard credit card interest rates after the introductory period.
To consolidate debt through this method, you’ll need to apply for an unsecured personal loan from a bank, credit union, or other financial lender. The challenge with this type of consolidation loan is getting an interest rate low enough to make it worthwhile. Some credit unions charge up to 18% interest, comparable to many credit cards. Banks can charge interest rates that range from 9.5% to 10.32%, according to the Federal Reserve
Use the equity in your home to consolidate debt
Use the equity you’ve built up in your home through a cash-out refinance loan option and pay off high-interest debt (like credit cards) with an interest rate near 3%.
Cash-out refinance loans swap your current mortgage home loan with a new home loan for more money. You can get a cash-out refinance mortgage for up to 80% of your home’s value. With a cash-out refinance loan, you receive the difference between your current mortgage and your new home loan in cash or direct bank deposit. This allows you to pay off high-interest debt.
When should you consider debt consolidation?
Deciding when to consider debt consolidation starts with taking a look at your overall financial health. Your total debt — not counting your current mortgage — should be less than 40% of your gross annual income for best results with debt consolidation. Other key factors to consider include:
- Will you qualify for a low-interest debt consolidation refinancing loan, like FHA or VA refinancing loans?
- Do you have enough cash available monthly to handle your new loan amount?
Here’s how it could work. If you have five credit cards, each with interest rates between 19% and 25%, you make monthly payments, and your credit rating is favorable, a cash-out refinance loan could allow you to repay your debt with an interest rate in the single digits. That lower interest rate could potentially save you thousands of dollars, depending on your debt load.
How to qualify for debt consolidation
While each lender will be unique, several standard lending criteria are considered when applying for debt consolidation. These include:
- Your credit history, score, or rating
- Your annual income
- Your employment situation: are you full-time, part-time, seasonal, on-call, casual, self-employed, etc.
- Whether you have any assets
- If you have an income to debt ratio above or below 43% (to calculate, divide your monthly debt payments by your gross monthly income)
The most crucial aspect of qualifying for debt consolidation refinancing is demonstrating your ability to repay the loan you will receive.
Each lender will have its own specific eligibility requirements, and it’s important to discuss these with any potential lender early in your debt consolidation process. At River City Mortgage, we’re happy to go over all the available options at a time and place that works for you.
Debt consolidation can be a great tool if you are carrying debt, looking for ways to simplify your life, and save money while in the process.
If you’re looking into debt consolidation, the refinancing specialists at River City Mortgage are ready to use their experience, resources, and comprehensive knowledge to help you get the right tools for improving your financial health.
To learn more about how refinancing can help you consolidate your current debts at a lower interest rate, and receive a free home refinance quote, contact us today.