Debt · September 02, 2021

Consider Debt Consolidation Before Rates Increase

The COVID-19 pandemic has impacted all aspects of our lives, including working, parenting, socializing—even getting our groceries. One of the major changes the crisis has brought to the broader economy is a sharp drop in interest rates. However, as inflation continues to grow, interest rates are forecasted to increase. This means now might be a great time to consolidate your debt.

Because there are pros and cons to debt consolidation, you might be wondering whether it makes sense for you. The answer depends on your needs, goals and current circumstances. Here's what you need to know about consolidating debt right now.


Why debt consolidation could make sense now

Debt consolidation refers to moving several higher-interest-rate debt accounts to one lower-rate account. With the current lower interest rates in the market, it costs less for you to borrow money right now. That could benefit you and your family in three ways.

1 Pay down your debt faster

If you keep your payments the same with a lower interest rate, more of that payment goes toward paying down the amount borrowed, and less goes to interest.

2 Save 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 building your emergency savings or buying other things your family needs right now.

3 Simplify your debt repayment

Instead of making several different smaller payments to credit cards, credit lines or loans throughout the month, you make one larger payment.

Deciding what debt to consolidate

What debts you should consolidate and the method that makes sense for you depend on the types of debt you currently have, as well as your credit score.

Student loans

The federal student loan interest rate of 0% has been extended through January 31, 2022. Until that day is reached, it doesn't make financial sense to consolidate your student loan debt. Because this is the final extension on interest-free payments, now's the time to pay off as much of your student loans as you can reasonably afford.

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.

Home loans

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

Understanding your options

Low interest rates provide an opportunity to consolidate your debts and save yourself money. However, it's not the right choice for everyone. Talk to a financial advisor about whether debt consolidation might strengthen your personal financial situation.

Insights

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.