Debt consolidation: Is it smarter now or later?

Consolidating credit cards and other personal debt into a new loan can significantly lower monthly payments, reduce the amount of interest paid, or both.

When you're on a tight budget and trying to pay off debt, every dollar counts. Maybe you've been paying your bills diligently, but it seems like it's taking a long time to reduce the balances. If this sounds like you, you might consider a debt consolidation loan to pay down debt and take control of your finances.

Debt consolidation combines all of the debt you have into one payment. There are different ways you can consolidate your debt to simplify your bills and possibly save money in payments or interest. You can refinance your home loan and use the existing equity to pay off a vehicle you have. You can also apply for a loan (sometimes with a better interest rate) that will allow you to pay off various credit cards or medical debt.

Consolidating credit cards and other personal debt into a new loan can significantly lower monthly payments, reduce the amount of interest paid, or both. If you use this strategy, ask yourself whether you have the budget and discipline to avoid debt on your cards again. If not, you may want to consider a different route because having open credit cards could tempt you into racking up more debt on top of the large loan you used to pay off the cards in the first place.

If you're the type of person who only makes the minimum payment each month on your credit cards, you might be drowning in high-interest rates. Consistent payments help boost your credit score, which means you could be eligible for a low-interest loan that will give you one convenient payment and a timeline for your debt.

It's never a guarantee that your monthly payments or interest rate will decrease when you consolidate your debt. In some cases, refinancing can cost more. Ask your financial institution for help calculating whether you can lower your monthly payment. Mountain America Credit Union's debt consolidation calculator can also help you test several scenarios to find the one that enables you to pay off debt most efficiently.

When you have a small amount of debt that can be paid off in a few months or have debt exceeding more than half your income, debt consolidation may not be for you.

In some cases, providing collateral can help you secure a loan. Collateral is an asset that you promise to relinquish to a lender if you default on the loan. For someone without the best spending habits, this can be risky, but it gives lenders an incentive to offer a loan they may not have granted otherwise.

Rolling unsecured debt into secured debt, such as a mortgage refinance, home equity or car loan, will likely give you a far lower rate because you're often offering up the home or vehicle you're paying off as collateral. With this option, you may lower your monthly payment, but you may end up spreading your debt over a much longer period, particularly with a home equity line of credit (HELOC) or mortgage loan.

Consult your financial institution when you are weighing your options for debt management, and don't rush into something before you know how it will affect your future.

Mountain America Credit Union's free Value Analyzer tool can help you see if you can consolidate your debt or refinance your loans at a lower rate. A free value analysis takes just a few minutes, but it could save you hundreds, or even thousands, of dollars in interest and reduce your total number of payments.

You can make an appointment for a free value analysis here. You can also call, visit a branch or look online to discover how Mountain America Credit Union can help you and your finances.