Debt Consolidation Options

7/11/2022

South African human rights activist Desmond Tutu once famously said, “there is only one way to eat an elephant: a bite at a time.” 

While this may be poor advice for a restaurateur, it’s pertinent and timely advice for anyone with credit cards, student loans, medical bills, or any other kind of personal debt. 

The average American has more than $90,000 in personal debt a journey of a thousand miles for most. But taking the first step on that journey is something you can do today by consolidating your debt with a personal loan. 

Debt consolidation loans are personal loans used to pay off multiple debts and to consolidate several different bills into one monthly payment—usually with a lower effective interest rate. Rather than juggling multiple credit cards, student loans, personal loans, etc., a personal loan for debt consolidation allows you to eat the elephant one payment, or one bite, at a time. 

Benefits of Debt Consolidation 

Personal loans are good for debt consolidation for many reasons, but it’s important to do the research to know if they’re right for you. Every individual situation is unique, but these are some of the benefits of debt consolidation to consider when weighing whether to take out a personal loan: 

  • Lower effective interest rates. Unless you have a low-rate credit card, your credit cards may have an annual percentage rate as high as 36%. Depending on your individual debts, consolidating them into a personal loan may result in a lower overall interest rate. 
  • Build good credit. Although the initial hard request on your credit report may temporarily lower your credit score, a personal loan for debt consolidation can also result in long-term credit building with on-time payments. Credit scores are tabulated from many different factors, including your total available credit, credit usage, payment history, etc. so a debt consolidation loan isn’t a one-stop-shop for building good credit, but along with on-time payments, a personal loan can help recover your credit—especially if you’ve been late paying back your other debts. 
  • Repay existing debt. One of the most obvious upsides to a personal loan for debt consolidation is that it condenses several sources of debt into one monthly payment. Not only can that potentially save you money by lowering your effective interest rate, but it also makes it easier to keep track and stay on top of your finances. 
  • Set payment periods. Debt consolidation loans simplify your finances by taking some of the mystery out of repaying your debts. With a personal loan for debt consolidation, you will know upfront how much your monthly payments will be and how long it will take to pay off. Credit Unions such as Arkansas Federal offer fixed-rate personal loans that make financial planning as easy as possible.

Downsides of Debt Consolidation 

Of course, if debt consolidation were always the right strategy, everybody would do it. Taking out a personal loan to consolidate debt isn’t right for everyone or every situation, and consumers should consider some of the potential downsides before making a decision: 

  • Potential for higher interest. While debt consolidation loans can have lower rates than other kinds of consumer debt, it all depends on your individual situation. If your current debts have a lower overall rate than a personal loan, then debt consolidation might not be the right strategy for you. 
  • Potential for higher debt. If you take out a debt consolidation loan to pay off credit cards, there is always the temptation to continue using those cards to rack up more debt. Because taking out a personal loan increases the amount of credit available to you, there’s a potential for ending up in more debt than you started with if you don’t use your credit responsibly. 
  • Potential for harming credit. In the same way that on-time payments can boost your credit score, missed payments can result in a lower credit score as well. Of all the factors that contribute to your credit report, payment history accounts for 35% of your total score, so don’t take out a personal loan unless you plan on making on-time payments. 

Other Factors to Consider 

Your personal credit history affects what loans you will qualify for and how much you can borrow. If you have good credit, this is great news! Arkansas Federal Credit Union calculates personal loan eligibility by evaluating factors such as your personal financial history, credit score, and current income.

If you don’t qualify for an unsecured personal loan based on your credit history, you can also consider a secured loan such as a home equity loan.  Remember that every individual situation is unique, and it’s important to do your own research and talk to a finance professional before making any decision.

Since your income is a big factor in your ability to qualify for and repay a personal debt consolidation loan, you should consider your job security and future plans. If you plan on changing careers or expect to make a significant life change (such as having a child or getting married), you should keep those factors in mind before applying for a personal loan, as your finances may shift. Since credit is a double-edged sword, a personal loan for debt consolidation can boost your credit or deflate it. Making on-time payments and keeping your credit usage as low as possible will help set you up for credit success, but even one late payment can stay on your credit report for seven years.

Should I Take Out a Personal Loan for Debt Consolidation? 

Debt is a suffocating weight on many Americans’ shoulders. It may feel like an elephant sitting on your chest, but it doesn’t have to stay that way. By consolidating debt, you can regain ownership of your finances and get control of your monthly payments, one bite at a time. Arkansas Federal Credit Union offers its members competitive fixed-rates on personal loans, home equity loans, loan-building credit cards, along with a full range of financial services. Take advantage of their personal dedication to their members and explore your options to find the best solution for your unique situation. 

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