How Debt Consolidation Works

What is debt consolidation? How does debt consolidation work? Here’s everything you need to know about debt consolidation loans to learn if one is right for you.

Carrying a considerable amount of debt can be pretty disheartening –– especially when you’re managing multiple accounts from various creditors. Feeling overwhelmed with the thought of paying it off is also completely understandable. If you have substantial debt with high interest in the form of credit cards, student loans, or a car loan, debt consolidation might be a good option for you.

At CCCU, our goal is to help you and our Portland credit union members by setting you up for financial success. Oftentimes, the first step is to create a plan to get out of debt. What is debt consolidation? How does debt consolidation work? Here’s everything you need to know to find out if this is the right route for you.

What is debt consolidation?

So, what is debt consolidation exactly? Debt consolidation works by combining multiple high-interest lines of credit or loans into a single low-interest account. That way, you’ll only have to pay one monthly bill and are given the chance to save a significant amount of money on interest.

Ultimately, debt consolidation should allow you to pay off your debt faster. For example, let’s say you’re a Portlander with five credit cards and one auto loan. Your total monthly minimum payments might be somewhere around $600, giving you the impression that you’ll spend the next few years overwhelmed by multiple debts. By rolling these debts into a fixed-term personal loan, your monthly payment may drop to $400, and you’ll know when it can be paid off. If it’s a three-year loan, it will take you three years. With a five-year loan, it will take you five. It’s that simple.

When it comes to consolidating your debt, there are three routes you can take:

Apply for a low-APR personal loan with fixed-rate interest and use the lump sum to pay off your debts.
Apply for a low-interest credit card with free balance transfers and move your existing debt to that account.
Apply for a home equity line of credit (HELOC) and use the funds to pay off your debt.

Of course, in order to qualify for a credit card or personal loan with a low-interest rate, you’ll need to have a relatively good credit score. That said, as long as the APR (Annual Percentage Rate) is at least a couple percentage points lower than your current interest rate, you’ll be saving money by consolidating your debt.

The advantages of debt consolidation

A lot of our Portland credit union members ask us about the benefits of debt consolidation. We explain that there are plenty of advantages to moving what you owe into a single account that helps you save. In addition to saving you money on interest, advantages of debt consolidation include:

One monthly bill, simplifying your debt management
An opportunity to pay off your debt sooner
A boost to your credit score from paying off small accounts
Reduced financial stress
A path to becoming debt-free

If you feel like you’re balancing multiple bills and have difficulty making your monthly minimum payments, debt consolidation can offer some hope by making things a little easier.

When is debt consolidation a good idea?

Debt consolidation is a smart choice if you have a decent credit score and expect approval on a low-interest rate loan. You also need to make sure you can afford the monthly payment toward your consolidated loan or line of credit. If you’re behind on payments, be sure to calculate what you can afford before opening another account or consolidating your debt.

Lastly, you should be committed to paying off your debts. If you’re approved for a low-interest loan or credit card, you must avoid using the funds on anything other than consolidating your accounts.

Low-interest loans and debt consolidation from CCCU

If you’re looking for a debt management solution, loan consolidation might be a good choice. Consolidated Community Credit Union offers fixed-rate personal loans and low-interest credit cards as well as home equity lines of credit to our members in the Pacific Northwest. Apply now, or visit one of our Portland branches to learn more about personal lending.