Debt consolidation 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 also bring other benefits. Similar to how business executives must regularly examine their balance sheet to see if there are opportunities to consolidate or reduce the company’s debt load, you should review your own debt situation to see what you can improve.
Learn what to keep in mind as you check your personal balance sheet.
- 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, with rates on the rise, it may be time to take another look at your borrowing. Consolidating all your loans into just one with a competitive interest rate could help you lower the overall interest that you would be paying.
- Financial Stress Load
By consolidating you can simplify what you need to keep track of. If you have credit cards or other forms of debt they may all have different due dates and ways they accept payments. By consolidating, you can have one payment date and transaction to keep track of each month.
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, and use the proceeds to pay off other debt. Note though, that these loans carry the risk that you could lose the underlying collateral if you default on the loan.
One other type of secured loan that can be useful for debt consolidation is a securities based loan (SBL). This type of loan allows qualifying 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 choose to have interest rolled into the principal rather than making interest and/or principal monthly payments.
There are risks associated with a securities based loan, including the potential for having to repay your loan or replenish collateral if the value of the pledged securities drops.
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 be aware of the depth of 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. If you are a Morgan Stanley client and are not sure if consolidating is the right move, or how to go about it, contact your Morgan Stanley Financial Advisor to go over the strategies and products that may be available to you.