2681: Should You Do a Debt Consolidation Loan? by James Lambridis of DebtMD on Financial Security

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[00:01:04] Should You Do a Debt Consolidation Loan? By James Lambrides of DebtMD.com.

[00:01:10] And I'm your host and personal finance enthusiast, Diania Merriam.

[00:01:14] We're going to jump right into our next post as we optimize your life.

[00:01:18] Should You Do a Debt Consolidation Loan? By James Lambrides of DebtMD.com.

[00:01:28] Perhaps your credit card bills have been piling up ever since you took that vacation to Aruba

[00:01:33] last summer, or maybe you had a medical emergency that your health insurance did not

[00:01:37] fully cover. It could even be that you're still stuck with some student loans that

[00:01:41] you took out when you decided to go back to school and you want to accelerate their payoff.

[00:01:46] No matter what types of bills may be hindering your financial health,

[00:01:50] a debt consolidation loan is a viable option to help you save money and become debt-free in

[00:01:55] a reasonable time frame. However, before taking out a loan, there are several things to consider.

[00:02:01] Where Can You Get a Debt Consolidation Loan? The good thing is that in today's day and age,

[00:02:07] there are many lenders and financial institutions that offer these types of loans.

[00:02:11] You can start off by checking in with your local bank or credit union,

[00:02:15] as this is where you'll find the lowest interest rate. If you cannot get approved by them,

[00:02:20] there are plenty of online peer-to-peer lenders that offer debt consolidation loans.

[00:02:25] Upgrade, Upstart and SoFi are three of the most reputable. While your interest rate through

[00:02:31] these platforms may be a bit higher, the application process is seamless and everything

[00:02:35] can be done online. Should You Apply for a Debt Consolidation Loan?

[00:02:41] Deciding whether to do a debt consolidation loan boils down to two very simple things.

[00:02:46] Are you lowering your monthly payment and or interest rate?

[00:02:50] If you can accomplish one of these, or ideally both, a debt consolidation loan probably makes

[00:02:55] sense for you. There are many lenders out there who offer these types of loans.

[00:02:59] However, interest rates can vary significantly, ranging anywhere from 5% all the way up to

[00:03:05] 35%. There's no point in taking out a loan at 30% APR to pay off credit cards with an average

[00:03:12] interest rate of 19%. While it may feel good to get rid of some high credit card balances,

[00:03:17] a high interest loan won't benefit you at all. Your monthly payment will be just as high and

[00:03:22] you won't be saving any money on interest. In the end, it comes down to a simple numbers game.

[00:03:28] If you're able to save money on a monthly basis and can lower your overall interest rate

[00:03:33] through a debt consolidation loan, then you should do it. If not, then stay away and do as best you

[00:03:38] can to apply more funds to paying down your individual bills. Common Misconceptions

[00:03:45] There's a common misconception that by doing a debt consolidation loan,

[00:03:48] you instantly become debt-free. On the contrary, all you're really doing is

[00:03:53] transferring your debt from multiple bills to one loan. While it does simplify your finances,

[00:03:58] the fact of the matter is, you still owe money that you need to pay back.

[00:04:02] Bottom line, a debt consolidation loan isn't a magic pill that solves your debt problem.

[00:04:07] It's simply a vehicle to help you become debt-free quicker while saving money in the process.

[00:04:13] Another misconception is that by doing a debt consolidation loan,

[00:04:17] you'll instantly improve your credit score. However, depending on how many

[00:04:21] inquiries on your credit you've done, applying for a new loan can actually hurt

[00:04:25] your credit score. While you'll be paying off high-balance credit cards,

[00:04:29] you'll also have a new loan on your report. Once the loan is pay off and your overall debt has

[00:04:34] decreased, you can expect your score to improve. Lastly, even if you do pay off your debt with

[00:04:40] a consolidation loan, you should still try to improve your budgeting and personal financial

[00:04:45] planning. Learn from your mistake of getting into debt and make sure you stay debt-free in

[00:04:50] the future. You keep doing a log of all of your expenses and try to do away with any unnecessary

[00:04:56] expenditures. After becoming debt-free, your next initiative should be to begin building your savings.

[00:05:03] According to Spend Me Not, 69% of adult Americans have less than $1,000 in a savings account.

[00:05:10] 54% of those aged 45 to 54 have no savings and 22% of Americans have less than $5,000

[00:05:19] saved for retirement. The key to accruing a substantial amount of savings is to live within

[00:05:25] your means. Track everything and always be sure that your monthly income exceeds your monthly expenses.

[00:05:32] Mistakes to Avoid A big mistake to avoid at all costs is securing

[00:05:37] a debt consolidation loan and proceeding to charge on the same exact credit cards you

[00:05:41] paid off with the loan proceeds. Many people fall into this trap and it only

[00:05:46] exasperates their debt problem. Doing this means that you now have a loan payment to make

[00:05:52] and also need to worry about paying all of your credit cards.

[00:05:56] Another mistake to avoid is transferring all of your debt onto one loan. If you have a low-interest

[00:06:01] credit card or an auto loan, which will typically have a lower rate than other unsecured debts,

[00:06:06] there's no need to include those in the debt consolidation loan.

[00:06:10] Focus on consolidating only your highest interest bills into the new loan.

[00:06:15] Lastly, despite consolidating your debt, you should still continue to improve your budgeting

[00:06:20] and financial planning. The reason many people get into debt in the first place is from their lack

[00:06:25] of a budget. Track all of your spending through a spreadsheet and know exactly how much of your

[00:06:30] monthly income goes towards essential bills and discretionary spending. When your total

[00:06:36] expenses exceed your total income, that's when you know there's a problem and you need

[00:06:40] to change your habits. Recap three takeaways. Number one, only do a debt consolidation loan

[00:06:48] if you can lower your monthly payment and or interest rate. Number two, once you've secured the loan,

[00:06:54] stop charging on your credit cards. And number three, improve your budgeting so you can avoid

[00:07:00] incurring debt in the future. You just listened to the post titled,

[00:07:08] Should You Do A Debt Consolidation Loan? by James Libritus of DebtMD.com and I'll be right

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[00:09:24] Code POD. I think a debt consolidation loan could be helpful if you've already diagnosed

[00:09:30] and dealt with the issues or behavior that caused you to get into debt. If you don't

[00:09:35] qualify for a consolidation loan, you might be tempted to look at offers from debt settlement

[00:09:40] companies. So I wanted to offer a word of caution here. The Consumer Financial Protection Bureau

[00:09:46] issued an article highlighting the dangers of working with debt settlement companies,

[00:09:50] also sometimes called debt relief or debt adjusting companies. Debt settlement could

[00:09:56] leave you deeper in debt than you were when you started. Most debt settlement companies

[00:10:01] will ask you to stop paying your debts in order to get creditors to negotiate

[00:10:05] and to collect the funds required for a settlement. But some of your creditors may

[00:10:10] refuse to work with the company you chose. These settlement companies also charge expensive fees

[00:10:16] and in many cases they won't be able to settle all of your debts. If that happens,

[00:10:20] the built up penalties and fees on the unsettled debt may wipe out any savings the company

[00:10:26] achieves on settled debts. Stopping payments on your debt and avoiding the collection calls as

[00:10:31] debt settlement companies will tell you to do will have a negative effect on your credit score

[00:10:36] and could result in the creditor or debt collector filing a lawsuit against you.

[00:10:40] An alternative to a debt settlement company is a non-profit consumer credit counseling service.

[00:10:46] These nonprofits can attempt to work with you and your creditors to develop a debt management

[00:10:51] plan that you can afford. They also will help you develop a budget and provide other

[00:10:56] financial counseling. Check out the National Foundation for Credit Counseling. They're a

[00:11:01] nonprofit network of certified financial counselors that can help you come up with a plan and

[00:11:06] negotiate your debt. And that will do it for today. Have a great day and weekend,

[00:11:11] and I'll be back here tomorrow where Optimal Life awaits.