Debt consolidation, the process of combining multiple debts into a single loan, may be able to help lower your interest payments, your financial stress load and help you gain a more streamlined view of your finances.
You may think of debt consolidation as financial first aid for people who have borrowed too much and need help climbing out of debt. But reducing the number of loans you carry can make your financial life easier and bring other benefits. Just as business executives must regularly examine their balance sheet for opportunities to consolidate or reduce the company’s debt load, you should review your own debt situation for potential areas of improvement.
Learn what to keep in mind as you check your personal balance sheet.
What to Consider
- What Interest Rates You Are Paying
You did your research and got the best interest rate available at the time you took out each loan. Now, after time has passed prevailing rates may have changed, it may be time to take another look at your borrowing. While overall rates have gone up in recent years, if you’ve improved your credit score over time, that could also lower the interest rate you can access for your debt. Consolidating your loans into just one with a competitive interest rate could help lower the overall interest that you would be paying.
- Financial Stress Load
Consolidating your loans streamlines the number of accounts you have to manage. If you have credit cards or other forms of debt they may all have different due dates and payment methods. By consolidating, you can have one payment date and transaction to keep track of each month.
If debt consolidation leaves you with a higher interest rate, or a single payment that’s going to put a strain on your monthly budget, it might not be the right path for you. Your Financial Advisor can help you understand your options and how they fit into the rest of your financial picture.
Which Loans to Consider for Debt Consolidation
There are several options available if you’re looking to consolidate.
Unsecured loans, including the traditional bank loan, often involve the least amount of risk to your other assets, but may require that you hold a high credit score to access the best rates. They also may require a lengthy application process and extensive paperwork, as well as incurring loan fees and higher interest charges than some other options.
Secured loans, such as a home equity line of credit, usually have the advantage of lower rates than credit cards. For instance, you could pay off debt with the help of your mortgage if you qualify for a cash-out refinance or a home equity line of credit on your house. Note though, that these loans carry the risk that you could lose the underlying collateral if you default on the loan.
One option that some borrowers use is a credit card that offers a low- or no-interest balance transfer. While that can be a cost-effective option without a lot of paperwork, it’s important to have a plan to pay off the balance before the introductory period expires, otherwise you may end up with an even higher rate on the unpaid balance.
Seeking Better Loan Interest Rates
One other type of secured loan that can be useful for debt consolidation is a securities based loan (SBL). This type of loan allows qualified borrowers to obtain a line of credit by using eligible investments in a portfolio as collateral. It may potentially offer better rates than the loans you are consolidating.
Another potential advantage of consolidating other debt into an SBL is that your repayment schedule may be more flexible than other types of loans. For instance, as long as you maintain sufficient collateral, you may be able to have interest rolled into the principal rather than making interest and/or principal monthly payments.
Gaining a Broader View of Your Finances
Reviewing your lending options with the company that already handles your investment portfolio or savings account may bring multi-product discounts or other perks. Your Financial Advisor should know your loan commitments to gain a holistic view of your finances and suggest the best strategies to help meet your financial needs.
If you’re thinking about consolidating debt, it makes sense to consider whether such a move would save you time, stress or money, and whether it may give you a better handle on your overall financial picture. For more information on debt consolidation strategies, Morgan Stanley clients should contact their Financial Advisor.
