With rates still near historic lows, now is a good time to consider consolidating what you owe into a fixed-rate loan or at least one with a lower cost. But make sure you understand at the outset that your overall costs may increase even if your monthly payments are lower. Rolling short-term and credit card debt into a longer-term loan can mean your final costs to pay off those balances will be higher.
Tools for consolidating
As the economy strengthens, demand for credit is likely to increase, pushing interest rates higher on debt with rates that can vary depending on market conditions as opposed to fixed-rate loans. So it’s a good idea to prepare for this situation now by reducing or eliminating as much of your rate-sensitive debt as possible, using a new, lower-cost loan to wipe out those with higher costs. Here are a few ways to start this process:
- Get organized. Sort out what you owe by whether the debt is subject to rates that can change or will remain fixed. For instance, most credit card issuers can reset rates on outstanding balances periodically. Also, rank debts by the interest rates charged to help prioritize which ones to pay off sooner.
- Apply for a MCCU Visa® Platinum Card. MCCU's Visa® Platinum Card offers an amazingly low intro rate, plus no annual fee! When you transfer higher rate balances to this card, you'll be able to pay down the balance faster.
- Home Equity Line of Credit. A Home Equity Line of Credit (HELOC) can be a good option for those who own their house or condo and have a mortgage balance that’s lower than the property’s market value. You can usually borrow against part of the difference. With a HELOC, you may be able to get an income-tax benefit on the interest (always check with your tax advisor), unlike the interest charged on a credit card balance, provided you itemize your deductions.
- Refinance Your Mortgage. Another option for homeowners can be refinancing your property with a lower fixed-rate mortgage. With excellent credit, you may qualify for a low, fixed rate, which also may provide tax benefits (again, check with your tax advisor).
- Refinance Your Car Loan. Car equity can also offer a way to pay off high-interest debt by refinancing your car loan or borrowing against a vehicle you own outright. You can usually get a much lower rate than most credit-card issuers charge or even on personal loans because your vehicle provides collateral for the lender.
- Personal Loans. For those who don’t own a home or lack enough equity to borrow more against it, a personal loan can be another good option if you have balances on credit cards. MCCU's Personal Loans offer a variable or fixed-rate option, with flexible terms.
- Share Secured Loan. If you’ve managed to set aside some savings, you may also be able to take a personal loan that’s secured by that cash. Because the debt is backed by money that’s readily available if you fail to pay, it may be easier to obtain this type of loan and the costs may be lower.
Consolidating debt can help you avoid or minimize the effects of rising interest rates, but there are a few potential pitfalls. If you decide to go with a home equity line of credit or mortgage refinancing, make sure you can cover the payments – otherwise your house is on the line. Similarly, borrowing secured by your car or savings puts those assets at risk as well, if you don’t pay up. Keep in mind that government statistics show credit unions often offer lower interest rates on various types of loans than other financial institutions. And with market rates still near historic lows, now is a good time to consider ways to lock in low-cost financing and cut out high-priced debt.
« Return to "Matadors Money Matters Blog"