3553: Should You Do a Debt Consolidation Loan? by James Lambridis of DebtMD on Debt Payoff Strategy

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[00:01:01] Perhaps your credit card bills have been piling up ever since you took that vacation to Aruba last summer. Or maybe you had a medical emergency that your health insurance did not fully cover. It could even be that you're still stuck with some student loans that you took out when you decided to go back to school and you want to accelerate their payoff. No matter what types of bills may be hindering your financial health, a debt consolidation loan is a viable option to help you save money and become debt free in a reasonable time frame.

[00:01:29] However, before taking out a loan, there are several things to consider. Where can you get a debt consolidation loan? The good thing is that in today's day and age, there are many lenders and financial institutions that offer these types of loans. You can start off by checking in with your local bank or credit union, as this is where you'll find the lowest interest rate. If you cannot get approved by them, there are plenty of online peer-to-peer lenders that offer debt consolidation loans.

[00:01:57] Upgrade, Upstart, and SoFi are three of the most reputable. While your interest rate through these platforms may be a bit higher, the application process is seamless and everything can be done online. Should you apply for a debt consolidation loan? Deciding whether to do a debt consolidation loan boils down to two very simple things. Are you lowering your monthly payment and or interest rate?

[00:02:22] If you can accomplish one of these, or ideally both, a debt consolidation loan probably makes sense for you. There are many lenders out there who offer these types of loans. However, interest rates can vary significantly, ranging anywhere from 5% all the way up to 35%. There's no point in taking out a loan at 30% APR to pay off credit cards with an average interest rate of 19%.

[00:02:46] While it may feel good to get rid of some high credit card balances, a high-interest loan won't benefit you at all. Your monthly payment will be just as high, and you won't be saving any money on interest. In the end, it comes down to a simple numbers game. If you're able to save money on a monthly basis and can lower your overall interest rate through a debt consolidation loan, then you should do it. If not, then stay away and do as best you can to apply more funds to paying down your individual bills. Common Misconceptions

[00:05:16] Many people fall into this trap, and it only exasperates their debt problem. Doing this means that you now have a loan payment to make and also need to worry about paying all of your credit cards. Another mistake to avoid is transferring all of your debt onto one loan. If you have a low-interest credit card or an auto loan, which will typically have a lower rate than other unsecured debts, there's no need to include those in the debt consolidation loan.

[00:05:42] Focus on consolidating only your highest interest bills into the new loan. Lastly, despite consolidating your debt, you should still continue to improve your budgeting and financial planning. The reason many people get into debt in the first place is from their lack of a budget. Track all of your spending through a spreadsheet and know exactly how much of your monthly income goes towards essential bills and discretionary spending.

[00:06:07] When your total expenses exceed your total income, that's when you know there's a problem and you need to change your habits. Recap Three takeaways Number one, only do a debt consolidation loan if you can lower your monthly payment and or interest rate. Number two, once you've secured the loan, stop charging on your credit cards. And number three, improve your budgeting so you can avoid incurring debt in the future.

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[00:08:26] If you don't qualify for a consolidation loan, you might be tempted to look at offers from debt settlement companies. So I wanted to offer a word of caution here. The Consumer Financial Protection Bureau issued an article highlighting the dangers of working with debt settlement companies, also sometimes called debt relief or debt adjusting companies. Debt settlement could leave you deeper in debt than you were when you started.

[00:08:51] Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. But some of your creditors may refuse to work with the company you chose. These settlement companies also charge expensive fees, and in many cases, they won't be able to settle all of your debts. If that happens, the built-up penalties and fees on the unsettled debt may wipe out any savings the company achieves on settled debts.

[00:09:20] Stopping payments on your debt and avoiding the collection calls, as debt settlement companies will tell you to do, will have a negative effect on your credit score and could result in the creditor or debt collector filing a lawsuit against you. An alternative to a debt settlement company is a nonprofit consumer credit counseling service. These nonprofits can attempt to work with you and your creditors to develop a debt management plan that you can afford. They also will help you develop a budget and provide other financial counseling.

[00:09:49] Check out the National Foundation for Credit Counseling. They're a nonprofit network of certified financial counselors that can help you come up with a plan and negotiate your debt. And that will do it for today. Have a great day and weekend, and I'll be back here tomorrow where your optimal life awaits.