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Debt Consolidation: How to Pay Off Debt Quickly

11/26/2018

Debt consolidation rolls your debt payments into one monthly bill as a way to help pay off debt quicker. Determine if debt consolidation is the right plan of action for you by reviewing our tips below.

How to Pay Off Debt Quickly

Three Tips to Pay Off Debt Quickly

Assess the Benefits of Debt Consolidation

Debt consolidation allows you to take out a single loan to pay off multiple debts or credit card balances, which leaves you with just one monthly payment rather than several. There are two different types of loans to consider: unsecured and secured loans. Unsecured loans do not include collateral requirements, so you won’t lose physical property if you can’t repay the balance. On the other hand, secured loans are tied to a physical asset, such as a home, and offer lower interest rates. The specific rate ultimately depends on your credit score, loan size and location. Your secured debt is more likely to be cheaper than an unsecured loan.

Identify Potential Risks

It’s important to keep in mind that if you’ve maxed out your credit cards and/or missed payments, you might have damaged your credit score enough to the point that you can’t qualify for a new loan or will face higher interest rates.

With unsecured loans, the possibility of accumulating higher interest rates is inevitable. This is due to the fact that they’re not backed by collateral and makes unsecured debt consolidation riskier for lenders. If your credit score is excellent, the difference could be manageably relative to what you would pay with a secured loan.

Alternately, secured loans present the risk of potentially losing your assets as collateral if you can’t repay your loan. Using a home equity loan to pay off credit cards is not the best way to consolidate debt. If you’re unable to make payments, you will lose your home. If you find yourself overwhelmed with unsecured debt, you can stop payments on those debts and still keep your property. Your credit will take a big hit but you will not lose your home.

Pay Off Debt Responsibly

To ensure that you avoid potential risks, paying off your debt responsibly is critical. Creating a realistic spending plan that you can commit to will help you in the long term. It’s important to live within your means; techniques such as creatively spending less on groceries, making frugal changes to daily habits and sticking to financial resolutions will help pay off debt naturally. Oftentimes, the best solution may be to simply pay off credit card debt and not consolidate at all. If you do go the consolidation route, be prepared to live without credit once you pay off your debt. Establishing smart financial habits such as budgeting and tracking your spending will help you avoid spending more than you can afford.

To learn more about debt consolidation, use the PFCU debt consolidation calculator.

Erin Elis 
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM

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