Should we consolidate our debt?

This was originally published on Monday, August 5, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My wife and I recently got married. Both of us have school loans, car loans and some credit card debt before we got married. We are thinking about getting a consolidated loan to work our way out of debt. Can you give us some information about consolidated loans?

Congratulations on your recent marriage! It can be challenging when two individuals become one and are now sharing one financial goal. Previous relationships, credit cards or other loans that were once one person’s financial responsibility are now shared with their new partner and vice versa.

A consolidated loan or debt consolidation involves taking out a new loan to pay off preceding debts, such as credit card, personal, school or car loans. You can combine several existing loans into one loan. It can be a very powerful tool to reduce debt quickly and improve monthly cash flow if done properly.

There are several ways to consolidate your loans:

• Credit card balance transfer. You may have been offered a credit card with a very low interest rate and are thinking about accepting it and paying off your outstanding debt. Many of these cards are offered as a marketing tool. Pay close attention to the fine print. How long will the low interest rate beH in effect? After the promotional interest rate period is over, how high is the interest rate going to be? Are there any hidden fees? If you are going to use a credit card as a way to consolidate your debt, you will need a credit card with a large enough credit limit and a low enough interest rate that would make using the credit card a more economical and smart choice.

• Personal loan. An unsecured personal loan from a financial institution can be used to pay off your debts. It is important that you choose wisely. You do not want to be in a situation where your monthly payments are larger than you what you are paying now or the interest is more than the combined interest you are paying currently.

• Home equity loan. A home equity loan uses your home as collateral. Many financial institutions require that you have a certain amount of equity paid into your loan. Home equity loans usually have a lower interest rate than most loans but carry the most risk. If an issue arises that you cannot make your payments, you risk losing your home. Most financial advisors usually caution that using your home to pay off debt is generally not a good idea.

• Debt consolidation loan. These loans are specifically used to consolidate debt into one loan. Interest rates depend on your credit rating. Some people with bad credit get approved for a consolidated loan but at very high interest rates. If you find yourself in that position, it is best to make a decision in which you are paying the least on interest or that your monthly payment is not higher than what you are paying now.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at and read past columns at the Money Matters blog at


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