Last week’s blog post about checking your credit report leads us to the next question I hear concerning debt consolidation. There are several credible companies and independents out there who can genuinely help. My recommendation is like any financial decision, large or small, get the facts and do your research! In many of my initial consultations the idea of debt consolidation seems to be the answer when debt overwhelms your monthly budget. At first it sounds like a great idea but read on……
You are not the only one burdened with debt. According to The Center for Microeconomic Data’s 4th quarter report on household debt and credit found that overall household debt increased by 1.4%, with steadily rising account balances over the last 5 years. In fact, overall household debt is 26.8% higher than it was just 7 years ago. With everything 2020 has brought us these figures are likely to be yet another surprise if the credit card was reached for even more than normal.
Debt consolidation is a simple concept. Basically, you combine all your smaller, individual loans into one large loan.
Debt consolidation offers only a few advantages to the borrower. What most of my clients are looking for are lower monthly payments, and a debt consolidation loan will provide that. In addition, the interest rates are often lower as well. Your result is you have only one bill to each month instead of multiple bills.
This is where the disadvantages override the advantages!! Despite a lower interest rate, you may end up paying more in interest by consolidating your debts. How would this happen? If you stretch out the payments for a longer length of time than you would have had on your individual smaller loans, the total interest you pay may well be higher. So do the math before you jump into a loan that seems great on the surface. To start paying off your debt with the end goal to becoming debt free the mindset and momentum plays a major role here. If you have multiple smaller loans and start paying them off from smallest to larges you see progress faster and more often.
In addition, having debt on your balance sheet negatively affects your net worth. Many people are concerned with eliminating debt ASAP – and a debt consolidation loan will usually do the opposite as it keeps you in debt much longer.
There are a few ways to handle debt consolidation, but each has their own pros and cons. Let’s take a look at them.
There are a few things to look for when deciding if loan consolidation is the right move. First, the single monthly payment needs to be lower than the combined payments. Second, the interest rate on the new loan needs to be lower than the average of the interest rates on the other loans. And third, if you need to put up collateral, such as your home or car, make sure you can comfortably make those monthly payments. You don’t want to lose a valuable possession you have worked extremely hard for and in the case of your home, your biggest asset.
**this content is for informational purposes only and is not intended as tax, legal, fiduciary, or investment advice. If you are considering debt consolidation please consult your financial advisor or as your coach we can walk through all the steps. You want to have accurate information first!