Why you should consider debt consolidation

With inflation taking a big bite out of consumers' spending power, the Federal Reserve will likely continue to increase interest rates as a countermeasure. As a result, now is a great time to consider debt consolidation. If you act quickly, you may be able to lock in lower rates before they rise further.

Still, even if you know the pros and cons of debt consolidation, you might be wondering whether it makes sense for you right now. The answer depends on your needs, goals and circumstances. Here's what you need to know about consolidating debt in this rising-interest environment.

Why consolidation could make sense now

Consolidating debt refers to moving several higher-interest-rate debt accounts to one lower-rate account. When rates are lower, it costs less for you to borrow money. This could benefit you and your family in several ways.

1Lock in lower rates

The Federal Reserve works to maintain economic stability to prevent either runaway inflation or stagnant economic growth. When inflation rises, it will increase interest rates to counteract its effects. Inflation remains high, so it's likely that the Federal Reserve will continue to increase rates in the near future. Because of this, you may want to consider consolidating debt because rates are likely to continue rising, at least for a while.

2Pay down your debt faster

Debt consolidation with lower interest can help you pay down your debt more quickly. Keeping your payments at the same level but with a lower interest rate means more of your payment goes toward paying down the amount borrowed—and less goes toward interest.

3Save more money for personal goals

When you consolidate debt to a lower-interest-rate account, some of the money you'd previously budgeted for debt payments could go toward personal goals. You could build up your emergency savings, for instance, or purchase other items or services your family needs right now.

Deciding which debts to consolidate

Choosing which debts to consolidate—and the method that makes sense for you—ultimately depend on your credit score and the types of debt you currently have.

Student loans

Student loans are a common target for consolidation. Many borrowers carry several student loans from multiple lenders, and student loan debt consolidation can give you a single loan with just one monthly payment. And while federal student loans have standard interest rates across all borrowers, private student loans may carry higher interest rates. Consolidating your private loans after you've improved your credit score could get you a lower rate or better repayment terms.

Debt consolidation may not be the right option for federal student loan borrowers, though. Federal loan consolidation doesn't change your interest rate, and consolidating federal loans with a private loan will mean you'll lose out on specific federal protections offered to borrowers.

Credit cards

Lenders continue to offer attractive programs and features to help borrowers. If you have existing credit card debt, look for low-APR offers from your current lenders. If you have strong credit, you might consider applying for a zero-interest APR balance transfer credit card offer.

Depending on your credit card balance, consolidation via a personal loan may be an inexpensive way to reduce the total cost of repayment while giving you a single monthly bill to pay. Your credit card behavior is a significant factor, though. If you're likely to run up your balance again once you've consolidated your credit card debt, a personal loan may ultimately cost you more than a balance transfer.

Home loans

If you're a homeowner with higher-interest-rate debt from a credit card, consumer loan or credit line balance, you might consider consolidating your more expensive debt with a new mortgage or home equity line of credit while interest rates are still lower. Because mortgages get paid back over many years, the additional debt you add to your mortgage gets spread out over several payments. This means you could replace higher regular loan payments with just a minimal increase in your mortgage payment amount.

Understanding your options

Lower interest rates provide an opportunity to consolidate your debts and save money. But just because interest rates are currently projected to go up doesn't mean debt consolidation is the right choice for all borrowers. If you're unsure whether consolidating your debt will strengthen or weaken your personal financial situation, talk to a financial advisor about your options. This will help you understand the best way to get your financial house in order, no matter which way interest rates are headed.