Debt consolidation can simplify your debt payments. Review available options based on your financial status and goals.

Debt can be overwhelming and stressful to manage. Consolidating and tackling your debt is a big step to gaining financial independence.

As with any debt plan, there is risk involved if mismanaged, but if payments are handled on time and further debt isn’t accumulated during the payback period, debt consolidation can be a solid part of your financial plan.

Let’s get started with the basics.

What is debt consolidation?

Debt consolidation works to simplify or lower your debt payments by rolling balances from separate credit cards and/or loans into one monthly payment. This is a debt strategy that you should carefully discuss with your banking partner to determine if consolidating your debt will help you achieve your financial goals.

Who is qualified for debt consolidation?

Many are eligible for debt consolidation, but each lender will have requirements for income and credit standards to qualify. To do this, you may need to provide things like a letter of employment, tax statements, statements for each loan you wish to pay off or letters from creditors.

When you participate in a consolidation plan, you are getting a new loan, which means you’ll have an interest rate. This rate can be based on a variety of things such as your credit score, your debt-to-income ratio and your current income. One benefit to debt consolidation is some plans offer lower interest rates than what you may be paying already, which can help you erase the debt quicker. Many debt consolidation plans are fixed-rate plans, meaning you would pay the same interest rate month over month for the life of the loan.

By rolling all of your debt into one single loan with a single interest rate, you could end up saving money. Discuss this option with your financial partners as you want to find the lowest interest rate possible.

Now that you know how to qualify for a debt consolidation plan, let’s learn more about the process.

How does debt consolidation work?

Consolidating your debt will require a holistic financial plan that includes all of your assets and debt. It can be intimidating to pull all of this together, but your financial partners are here to help. Lean on their knowledge to determine the best organizational strategy for you to capture and see this information together at once. Next, discuss your financial goals with your financial partner and see how paying down your debt would help you achieve them.

Once you have a holistic financial plan, there are three approaches you can consider based on your specific needs.

Option 1: Credit card balance transfer

Many credit card companies offer zero percent or low-interest balance transfers to combine your debt from multiple cards onto one card. So, for example, if you have two credit cards with a balance on them, you can transfer your balance from one card to the other so that you only have one bill to pay each month. This can help you keep track of different payment dates and terms by moving all credit card debt into one place.

With this option, you may have to pay a balance transfer fee, which could be a percentage of the amount you are transferring. Whatever promotional rate your credit card company offers you to transfer the balance could be for a limited time. It is also important to know that if you use this card for new purchases, you will have to pay interest on those purchases until the full balance is paid off, including the transferred balance. And if you are more than 60 days late on a payment, your interest rates may go up on all of your balances.

Credit card balance transfer is a good option to consider for someone that has a small amount of credit card debt that they know they can tackle in a short amount of time.

Option 2: Home equity loan or home equity line of credit

There is also a home equity loan and a home equity line of credit (HELOC). This is when you borrow money against the equity in your home to pay off debts. This is what is known as a secured loan because it is backed by your home as collateral. This will make the loan easier to obtain, but riskier if mismanaged. You use this money to pay off your loans and then you have to pay back the home equity loan.

A home equity loan is a lump-sum loan where your home serves as collateral. These loans have a fixed rate, consistent monthly payment amounts and you’ll receive the total amount at loan closing.

A HELOC is a reusable line of credit where your home serves as collateral with either adjustable or fixed rates. With this financing option you spend what you need. Monthly payment amounts can vary depending on how much of your HELOC you use and the interest rate.

This option brings risk in that if you don’t pay back the loan, your home could go into foreclosure. You also run the risk of owing more than your home is worth if the market shifts and the value of your home goes down.

A home equity loan is usually used for making large, one-time purchases. A HELOC is ideal for ongoing expenses like debt repayment and can be a good consideration if you have a solid and reliable payment plan for your home and the value of your home remains steady in today’s market.

Option 3: Personal loan or personal line of credit

These types of plans consolidate many types of loans into one location. Personal loans may be a lower-rate alternative to credit card repayment rates. Additionally, you may be able to secure smaller loans without collateral if you meet the loan requirements.

A personal loan is the most basic type of loan and probably the one you are the most familiar with. It is when a bank or lender gives you a lump sum based on what you qualify for to be used for a variety of purposes and to be paid back in installments of the original payment plus interest.

A personal loan and a personal line of credit can be unsecured or secured by your financial assets or other assets such as your car. For this lending option, the bank will determine how much equity you have based on your assets and set a loan limit.

As with a credit card balance transfer, the interest rates offered with a debt consolidation loan are usually temporary and will go up. This type of loan may be best for someone with more than just credit card debt that is aiming to manage it all in one place. It is also ideal for someone who can plan to pay off their debts in a year or less to lock in interest rates. Talk to your financial partner to learn if your financial situation would benefit from a personal line of credit.

Debt consolidation isn’t right for everyone.

It is important to remember when taking out any type of new loan, even one to improve your debt, your credit score will be impacted. Before you start on your path to debt consolidation, make sure you’ve discussed your credit score and strategies to improve or maintain it with your financial partner. You might want to work on a plan for making on-time payments or making payments in full before consolidating your debt further.

If you are offered a debt consolidation plan, sit down and take an honest look at your debts and the rates you are paying. If your current payments and rates aren’t better than what you’ve been offered in a consolidation, you should continue your current plan until your credit score goes up or you are offered a better plan option. Also remember that if you are offered a lower rate, but it is over a longer period of repayment time, you may actually be paying more in interest than you were before.

Most of all, it is important to remember that debt consolidation does not take any of your debt away, it just provides you with one singular payment for all your current debts.

If any of this applies to you, first reach out to your current creditors. Ask them if you have any options available for lower monthly payments or reduced interest rates. This is known as debt settlement vs debt consolidation. After doing that and working towards steady payments, get in contact with your financial team, to work through a consolidation plan that will work best for your situation.

Debt can be overwhelming and stress producing, but by working with a trusted financial partner, you can get a handle on your finances. Lean on your partners to help you establish a budget, a repayment plan and future savings goals.

UMB personal banking solutions are here to support you through every step of your financial journey. From checking accounts to home and auto loans, UMB will build a relationship with you and empower you to find the right products to help you achieve your financial goals.