If you are feeling the strain from monthly loan and credit card payments, bringing your debt under one umbrella may provide financial relief. Although there are several viable debt consolidation solutions, not every option may be the right fit for your needs.
Answering the question “Is debt consolidation a good idea?” depends on many wide-reaching factors. By understanding how debt consolidation works, possible alternatives, as well as its pros and cons, you will be in a better position to make an informed decision.
Debt Consolidation Basics
The average American has more than $90,000 in debt that runs along the demographic breakdown of Generation X ($135,841), Millennials ($78,396), Baby Boomers ($96,984), and Gen Z ($9,593). When consumers roll their outstanding debt and multiple loan products into a single monthly payment, they are consolidating their debt and potentially saving money by securing a relatively low-interest loan. Using the new lower-rate funds to pay off other debts reduces the number of monthly bills, potentially saves money, and offers insight as to when the debt will be paid off in full.
When is Debt Consolidation a Good Idea?
For people with several high-interest loans or credit cards, debt consolidation is generally a good idea. If you have been making on-time loan and credit card payments, your credit score has likely risen. That could position you to gain approval for a low-interest consolidation loan such as a home equity loan, personal loan, or low-rate credit card which typically offers these benefits.
- Simplifies Finances: Combining multiple debts into one monthly payment reduces the chance of overlooking a monthly payment. Accidental oversights can damage your credit score and limit borrowing opportunities.
- Saves Money: By paying off higher-rate products with a lower-interest debt consolidation loan, it’s feasible to keep more of your money. Remember to run the numbers regarding the total interest paid between existing debts and that of a consolidation loan such as a home equity loan, personal loan, or low-rate credit card to see your potential savings.
- Expedites Payoff: It’s not uncommon for people to employ debt consolidation solutions to get out of debt quicker. By putting everything under one umbrella, the money you save in interest can be applied to the principal of the remaining balance while also offering you an end date where you potentially may be debt free.
- Reduces Monthly Expenditures: Paying down several loan products often squeezes monthly finances. With only one monthly installment in place, people typically have more cash on hand to enjoy life while still paying down existing debt.
- Improves Credit Score: Debt consolidation can help raise credit scores in several ways. Reducing overall credit utilization is a key metric in determining scores. Minimizing the balance on multiple accounts helps improve credit scores. Perhaps the most significant impact is the speed at which overall debt can be reduced.
Although debt consolidation strategies are widely used, it’s essential to conduct some due diligence. Not every program delivers the benefits consumers anticipate.
When is Debt Consolidation a Bad Idea?
It’s important for those considering debt consolidation to run the numbers before moving forward. While consolidation solutions such as home equity loans, personal loans, or low-rate credit cards provide proven benefits for many, there are exceptions to every rule. Consider the following scenarios in which a debt consolidation loan product might not solve your financial woes.
- Unexpected Costs: Some lending institutions charge exorbitant fees for origination, balance transfers, and closing costs. These and other fees add up, making the loan product less likely to deliver savings. CCCU continues to include only necessary and nominal fees. Be sure to research what additional costs will be added when you apply for a debt consolidation loan.
- Higher Interest Rate: One of the keys to a successful consolidation involves securing a low-interest rate. If the rate runs higher than one or more of your existing loans or credit cards, you could end up paying too much in interest.
- Poor Spending Habits: Part of your debt consolidation plan must include disciplined spending. After credit card balances are at zero, it’s crucial to only use them frugally and on a need basis. Racking up additional credit card debt coupled with a debt consolidation installment can be a perfect financial storm that ends in bankruptcy.
- Missing Payments: Borrowers seeking zero debt sometimes choose short repayment periods to regain financial freedom. When the installment strains the monthly budget, you risk missing a payment. Anytime personal loans or credit cards are not paid on time, credit scores take a significant hit. That’s why it’s critical to be realistic about your repayment bandwidth.
Before applying for a debt consolidation loan, families who are considering purchasing a home or another large purchase requiring help from a lender would be wise to understand the full impact that applying for a new loan has on your credit score. When a lender makes a hard credit inquiry during the approval process, your FICO score could dip by 5-10 points. Multiple credit pulls can significantly hamper your ability to gain mortgage or loan approval with the lowest possible interest rate, so be sure to plan accordingly. Don’t apply for both a mortgage and a debt consolidation loan at the same time.
Debt consolidation solutions can greatly improve your financial straits when managed responsibly. If you do not qualify for debt consolidation loans and are struggling with overwhelming debt, there are other options you may want to consider.
What Options Are Available If Debt Consolidation Isn't For You?
There are a variety of reasons that a straightforward debt consolidation loan may not be an option. Low FICO scores and an inability to qualify for a low enough interest rate rank among the common reasons people seek other forms of debt relief. While working with CCCU to design a debt consolidation solution may be the ideal scenario, there are other ways to get relief.
- Credit Counseling: There are non-profit organizations that work with everyday people to design debt relief plans. Techniques may involve negotiating loan and credit card payment reductions. Others include creating a debt management budget that strategically pays down balances.
- Debt Settlement: This option involves negotiating with creditors to reduce overall indebtedness and eliminate fees. Debt settlement typically comes into play when someone has passed a tipping point and faces potential bankruptcy. Creditors usually see the value in getting a portion of their outlay back rather than having it washed away in bankruptcy.
- Bankruptcy: Bankruptcy tends to be the last option worth considering to get relief from overwhelming debt. Those who file for bankruptcy often see their assets sold to pay creditors and must undergo credit counseling. Chapter 7 and 13 filers get a clean financial slate when it’s over. However, credit scores are badly damaged, and they may be disqualified from credit cards, personal loans, and mortgages for many years.
Struggling community members generally file for bankruptcy when they run out of options. Job loss and debilitating health conditions are among the leading reasons people file for bankruptcy instead of debt consolidation. For those generating some form of income, be sure to check with your local trusted lender to apply for a debt consolidation solution such as a home equity loan, personal loan, or low-rate credit card that will help you successfully get out of debt.
CCCU Has Debt Consolidation Solutions To Help
If you are feeling the strain of multiple monthly payments, and are looking for debt consolidation solutions, CCCU can help.
Our competitively low rates and minimal fees make our Home Equity Loans, Personal Loans, or Low Rate Credit Cards great debt consolidation solutions. Still have questions or need some help figuring out the best solution for you? Visit any of our branch locations.