Should I Wait to Consolidate My Debt Until Interest Rates Go Down?

Thanks to an inflation rate of over 3% for the past two years and a prime interest rate of 8.5%, consumers are experiencing a one-two punch that has really made it challenging to manage their finances.

In addition to the rising costs of everyday goods and services, interest rate hikes have impacted people’s financial goals.

You may want a car or home loan, but the current interest rates have kept that out of reach. Maybe you have higher credit card payments than you used to because of a recent interest rate increase.

After enjoying historically low interest rates, once inflation began to skyrocket, the Federal Reserve raised interest rates to help cool down the scorching hot economy.

Inflation has not lowered to the degree the Fed anticipated it would, so interest rates will remain the same or go even higher until inflation drops to 2%.

You may be wondering how to ease the pressure that interest rates and inflation have created on your finances.

One solution you may consider is consolidating your debt, but is now the right time to do it?

Below, we explore that question to help you decide whether to consolidate now or wait for interest rates to decrease.

Debt Consolidation Decision At-a-Glance

Should You Consolidate Your Debts Right Now?

Here are some compelling reasons why consolidating debt makes sense when interest rates are higher than they have been.

You have high-interest debts

While interest rates are currently high, consolidating your debts is a good idea if your accounts already have high interest. A debt consolidation loan may have a significantly lower interest rate than what you’re currently paying, particularly if you have car loans or credit cards with variable rates.

“When you’re consolidating debt, usually you’re talking interest that’s already at higher rates. A lot of people take credit card debt and consolidate it into personal loan debt,” said Virginia-based debt and bankruptcy attorney Ashley Morgan. “Credit card debt tends to be some of the highest interest rates you’re going to see. If we’re talking about getting a personal loan at 10, 15, or 16%, if you have credit cards that are 20, 25, or 30%, there’s still going to be some savings.”

Your credit score is at risk

If you have a lot of high-interest credit cards that are at their limit, consolidation may be an excellent way to help protect your credit score, according to Sharon Lechter, author of “Think and Grow Rich for Women.”

“If you’re sitting with debt at this very high interest rate, and you’re at your credit limit, it can impact your credit score in a negative way,” Lechter said.

Credit card companies may also make certain changes to your account terms, which can adversely affect your credit report.

“You never know if a credit card company is going to close your credit card, even if you’re in good standing. We saw that at the beginning of COVID when they weren’t sure about what was going on. Credit card companies started shutting down cards and lowering the available credit limits. That’s something you don’t have control over,” Morgan said. “If you have a loan, you don’t have to worry about those things happening and your credit score taking a hit.”

You want more structure in paying off your debts

When you have a debt consolidation loan, you have much more structure and stability with the terms, so you know exactly what to expect from one month to the next. By locking in an interest rate with a loan, even if it’s a little higher than you would like, you don’t have to worry about fluctuations that can occur with other types of debt.

“When you restructure your debt into a consolidation loan, you’re creating a very structured repayment period. The monthly payments could be higher than what you’re paying on your credit cards because you will be paying off that balance within a shorter period. It might be three years, five years, or six years,” said Laura Adams, author of “Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers” and host of the Money Girl podcast. “You have a very structured monthly payment, and at the end of that period, you are going to be debt free, so I think it gives people a nice structure.”

You can get a 0% interest rate

Despite the current state of interest rates, you may still get a good deal on a credit card balance transfer. You can often take advantage of zero percent interest for a certain period.

“We definitely are still seeing 0% interest balance transfer offers, though they may not be as generous as they were in the past. They do come with a transfer fee, so keep that in mind. You want to make sure that even with the fee, you would be saving money with the transfer offer,” said Adams. “If you can pay off the balance within the promotional period — maybe it’s 12 months or 18 months — that’s the ideal situation for using that type of card.”

You have equity in your home

If you can leverage the equity in your home to get a loan that allows you to pay off credit card debts, this can also be an effective strategy that will save you money on high interest.

“A lot of people will look at their credit cards and realize they have equity in their home, so they could get a home equity loan and pay off their credit cards. Sometimes that’s a really smart thing to do unless that puts you underwater on your house,” Lechter said. “But when you are paying 20 or 25% on your credit cards, you need to do something because what happens is not only are you throwing your money down the drain, but you’re more than likely hurting your credit rating. That’s something that has a long-term impact.”

The downside to using equity in your home to pay off high-interest debt is that you are trading in unsecured debt for secured debt. A loan that is secured by your home may offer a good interest rate, but it’s crucial to remember that a home equity loan is basically a second mortgage. If you lose the ability to make payments on it for any reason, you risk losing your home.

Another downside to using a home equity loan to consolidate your bills is that if you still have the loan when you sell your home, you must satisfy the loan with the proceeds, which could leave you with less of a profit than you expected.

Compare Financial Solution Providers

Finding the right lender could help you save hundreds or even thousands of dollars. The best way to know if you’re getting the best loan rate is to compare offers from competing lenders.

Should You Wait to Consolidate?

Although there are good reasons to consolidate debts right now despite rising interest rates, sometimes waiting may make more sense.

The following are good reasons to wait for interest rates to fall before taking the consolidation leap.

If You can’t pay off the debt during the balance transfer offer period

Although getting a 0% interest rate on a credit card transfer can certainly give you a lot of relief and help you pay off your debts, you should be realistic.

Can you pay off the entire amount during the promotional period, which may be six months to a year? If not, after the promotion ends, you’ll be hit with interest that may be even higher than what you were paying in the first place.

“The idea is that you will not have any new interest accrue on your balance during that promotional period. That could be a really nice savings, but if you don’t pay off that balance within the promotional period, you’re kind of back to square one at the end of it,” Adams said. “In fact, you may even have a higher interest rate than you had before. If you have a 20% card right now, and you get a new card with a 0% offer that lasts for 12 months, if you don’t pay off the balance at the end of that 12-month period, that new card may go up to 26% interest. So, at that point, you’d be paying more interest than you were originally.”

Similarly, it’s essential to remember that you have to make all of your payments on time when you do a balance transfer. Missing payments on this deal can also put you in a bad financial situation.

“There are a lot of hidden pitfalls because if you miss a couple of payments, you get back charged, so you really have to control your mindset and change your habits,” Lechter explained.

If consolidating your debt will significantly increase monthly payments

If you’re having trouble making the monthly payments on your debts now, depending on how much you owe, consolidation may not help. The monthly payments on a debt consolidation loan may be much higher than what you currently pay, and you won’t have any wiggle room to pay less.

“The big downside of consolidating is that potentially higher monthly payment. If you’re struggling right now, let’s say to make even a minimum credit card payment, it’s not likely that you would be able to afford a consolidation loan. I don’t know if waiting for a lower interest rate is necessarily a good strategy because it’s likely not going to happen anytime soon, but you should not consolidate a debt if that monthly payment would be unaffordable for you because if you miss that payment, that’s going to hurt your credit,” said Adams. “With credit card debt, you get to choose to make the minimum payment or to pay a little bit extra. If you’re struggling, I would say maybe just keep the credit card debt, but try to pay more each month.”

If there will be changes in your financial situation

regardless of the interest rates, if changes to your financial situation can put you in a better position to pay off your debts, you may not need to consolidate.

Morgan suggests that you factor in how your life may change in the coming months. If you make some positive changes to your finances, you may be able to tackle your debt without consolidation.

“A lot of times, the decision may depend on whether there are going to be changes to a financial situation,” said Morgan. “What are your finances telling you? Are you going to get a bonus where you can pay off the debts? Are you getting a new job? Are you selling a house? It may not make sense to consolidate because that can come with other expenses.”

Final Thoughts

If you find that consolidation aligns with your financial situation and goals, it might be the right step toward achieving debt relief.

However, it’s important to consider your specific circumstances and ensure that consolidation will not increase your financial burden. Evaluate your ability to make higher monthly payments if necessary, and consider the risks associated with converting unsecured debt to secured debt.

By taking a thoughtful and informed approach, you can make decisions that best support your journey toward financial stability and freedom.