Let's Talk Debt Consolidation

By Business Development Officer, Jon Maroni

Debt can be an uncomfortable subject to talk about, but at Spokane Federal, we want to make sure you know the options available in order to tackle it, like debt consolidation. Debt consolidation is the combination of multiple loans and credit cards into one monthly bill to hopefully lower your interest rate and maybe even monthly payment. If you have multiple loans and credit cards with balances, debt consolidation may be a good option for you, but there are several questions you want to answer before you begin the process. 

What type of debt do I have?

If you have multiple types of unsecured debt, a consolidation loan can be a great option to pursue. Unsecured debt such as credit cards, medical debt, and personal loans tends to have a much higher interest rate because it isn't secured by any collateral. The average credit card interest rate is 16.71%, an all-time high. If you have any type of credit account with a 15% or higher interest rate, consider consolidating as a potential way to lower your interest, monthly payment or total amount to be repaid. If you have secured debt such as auto or home loans it is likely that those interest rates are lower, however refinancing with Spokane Federal might save you money.  

Will a debt consolidation loan actually save me money?

Convenience is often touted as a reason to pursue debt consolidation, but it shouldn't be the primary reason. While having to manage multiple monthly payments to a variety of creditors can be frustrating, the purpose of debt consolidation is to hopefully save money. If consolidating your debt leads to an increase in your interest rate, monthly payment, or total amount you will have to repay, take pause before moving forward. Riding it out with your current creditors may not be the most glamorous option but may make the most financial sense. 

Am I comfortable seeing a dip in my credit score? 

If you are planning to access a loan in order to consolidate other debt, remember that doing so will likely have a negative impact on your credit score. Closing older accounts and establishing new credit shortens your overall credit history and if you are closing credit cards it can impact your utilization ratio. With a consistent payment history, your credit score will return to where it was and continue to improve, it just may take some time. If you need help or tips rebuilding your credit score we've got you covered

Do I have something that could serve as collateral?

Most people utilize an unsecured personal loan for debt consolidation, but a secured loan can help ensure the lowest possible interest rate and payment. If you put up a piece of collateral for the loan (a vehicle or home for example), your financial institution may look more favorably on your application. The reason for this is there is something tangible securing the loan. Keep in mind though that when you put up something as collateral, your Credit Union has a security interest in that collateral. 

Let's look at a theoretical example of debt consolidation:

Our theoretical member, Jon, has a good credit score (685) and the following credit cards:

  • A store credit card at 25% interest, with a balance of $3,500 and a monthly payment of $140
  • A travel rewards credit card at 20% interest, with a balance of $5,000 and a monthly payment of $200
  • A bank credit card at 18% interest, with a balance of $4,000 and a monthly payment of $160
     

If Jon only makes the minimum payment on each of these cards it would take him over 12 years to pay them off and he will repay over $21,000 total. If he were to get a $12,500 debt consolidation loan to pay off and close these cards with a 3 year (36-month term) at 9.25% interest, his monthly payment would be about $400. Not only has he freed up about $100 a month, but he has also lowered his interest rate and the total amount he will have to repay by a significant amount. Over the life of his debt consolidation loan he will repay $14,500, saving him almost $7,000 versus making the minimum credit card payments individually. 

Sounds appealing right? Debt consolidation can be a great option, so long as you are able to avoid getting right back into more debt. If Jon opens up new cards and racks up balances, he will find himself right back in this situation. 

At Spokane Federal we have several loan options to help you consolidate and most importantly, staff that have your financial best interests in mind. Contact us to get your questions answered and/or to start the debt consolidation process today! 

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