If you're feeling the strain from monthly loan and credit card payments, bringing your debt under one umbrella may provide you with 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 numerous factors. By understanding how debt consolidation works, it's pros and cons as well as possible alternatives, you'll 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). Consolidating debt into a low-interest rate loan reduces the number of bills you pay each month, may lower payment obligations, and could save you money on interest while giving you insight as to when the debt will be paid off in full.
When is Debt Consolidation a Good Idea?
If you have several high-interest loans or credit cards, debt consolidation may be a good fit for you. If you've been making on-time loan and credit card payments, your credit score has likely risen. A higher credit score could position you to gain approval for a low-interest consolidation loan such as a Home Equity Loan, Personal Loan, or low rate Visa Credit Card which typically offer the following benefits.
- Simplifies Finances: Combining multiple debts into one monthly payment reduces the chance of missing a payment. Accidental oversights can damage your credit score and limit future borrowing opportunities.
- Saves Money: Paying off higher-rate obligations with a lower-interest debt consolidation loan may save you money and lower your payment. Remember to run the numbers and compare the total interest you'd pay between existing debts and that of a new consolidation loan such as a Home Equity Loan, Personal Loan, or low-rate Visa Credit Card to see what your potential savings could be.
- Expedites Payoff: It’s not uncommon for people to use debt consolidation solutions to get out of debt fast. By putting everything under one umbrella, the money you save in interest can be applied to the principal of the remaining balance while also providing an end date toward becoming debt free.
- Reduce Monthly Expenditures: Paying down several loans or credit cards often squeezes monthly finances. With only one monthly payment in place, people tend to have more cash on hand to enjoy life while still achieving their goal of reducing debt.
- Improve Credit Score: Debt consolidation can help raise credit scores in several ways. Reducing overall credit use is a key metric in determining scores. Minimizing the balance on multiple accounts helps improve credit scores, but perhaps the most significant impact is the speed at which debt can be reduced or eliminated entirely.
Although these debt consolidation strategies are commonly used, it’s essential to conduct due diligence in ensuring the option you choose delivers the benefits that best fit your needs and financial situation.
Reveal tips to get out of debt fast while exposing unrealistic expectations by downloading our guide:
When is Debt Consolidation a Bad Idea?
It’s important for those considering debt consolidation to run the numbers before taking action. While debt consolidation solutions such as Home Equity Loans, Personal Loans, or low-rate Visa Credit Cards provide many proven benefits, there are exceptions to every rule. Consider the following scenarios in which a debt consolidation loan may not fit your financial situation.
- Unexpected Costs: Some lending institutions charge exorbitant fees for origination, balance transfers, and closing costs. These costs combined with other fees add up, making the loan less likely to deliver any savings. Be sure to research the additional costs that 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 more in interest.
- Poor Spending Habits: Part of your debt consolidation plan must include disciplined spending and responsible saving habits. After credit card balances are at zero, it’s crucial to only use them frugally and on an as-needed basis (such as an emergency). Racking up additional credit card debt coupled with a debt consolidation installment, can lead to financial mishaps.
- 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 loans or credit cards are not paid on time, your credit score takes a significant hit. That’s why it’s critical to be realistic about your repayment bandwidth.
Before applying for a debt consolidation loan, purchasing a home, or making another large purchase requiring help from a lender, it would be wise to understand the full impact it has on your credit score first. 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 a 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 finances when managed responsibly. If you don't qualify for a debt consolidation loan 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 why a debt consolidation loan may not be the best option for you. Low FICO scores and an inability to qualify for a low enough interest rate rank among the most common reasons people seek other forms of debt relief. While working with a credit union to design a solution that fits your needs may be the ideal scenario, there are other ways to find relief.
- Credit Counseling: There are non-profit organizations that can work with you to create a debt relief plan. Techniques may involve negotiating loan and credit card payment reductions. Others include creating a debt management budget that strategically pays down balances.
Peach State offers our members free debt and budget counseling from BALANCE Financial Fitness, our financial resource partner. BALANCE also offers a Debt Management Plan to help you access lower interest rates, a cessation of certain fees, and lower monthly payments.
- Debt Settlement: This option involves negotiating with creditors to reduce overall debt 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 money 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 you may find yourself disqualified from credit cards, personal loans, and mortgages for many years.
People generally file for bankruptcy when they've run out of options. Job loss and debilitating health conditions are among the leading reasons why people file for bankruptcy instead of debt consolidation. For those generating some form of income, be sure to check with your local trusted lender about applying for a debt consolidation solution such as a Home Equity Loan, Personal Loan, or low-rate Visa Credit Card that could help you successfully get out of debt.
Peach State Has Debt Consolidation Solutions To Help
If you're feeling strained from multiple monthly payments and are looking for debt consolidation solutions, Peach State can help! Our competitive low rates, flexible repayment terms, and minimal fees make our Home Equity Loan, Personal Loan, or Low-rate Visa Credit Card great options for consolidating debt.
For more tips to help you answer "Is debt consolidation a good idea?", review our Debt Consolidation: Expectations vs Reality Guide.