Monday, January 29, 2018
Should I Get a Debt Consolidation Loan?
Debt is never a fun thing to deal with. This week at Budget Boss, we are going to jump into the world of loans and how they affect your life. Someone once said, “There’s good debt and there’s bad debt.” In my opinion, it’s all bad, but there is some that is much worse than others. Credit Card debt is never good. It is an absolute nightmare to get rid of and sadly it was probably used to get stuff you don’t really need. A popular fast-track method to get rid of this overwhelming credit card debt is a consolidation loan. This is a loan that bundles all your debts into one easy monthly payment. Today I am going to describe the positives and negatives of consolidation loans. It is important to know what you are up against, especially because not all lenders will have your best interest at heart.
What is a debt consolidation loan?
If you have amassed enough debt in enough random places you might think your best option is a debt consolidation loan. This type of loan is where a single institution gathers all your debts into one single place. Often this is done with your financial institution, usually a bank or credit union. There are other organizations that offer consolidation loans, but you must be careful of the terms that lesser known places offer. Where consolidation loans become common is when an individual has several debts with higher interest rates, usually credit cards or lines of credit. Interest rates for these products can range from 5% all the way up to 23% in some cases. If you have a large enough balance, the monthly minimum payment then becomes unmanageable. In some cases, you can’t even afford to make the monthly interest payment. Finding a payment that you can manage then becomes necessary as you are now at risk for bankruptcy. A consolidation loan gathers all your debts, puts them together in one easy monthly payment, and usually gives you a lower interest rate.
What are the positives of debt consolidation loans?
Your debt will be paid off in a known amount of time
Ever see that box in the corner of your credit card bill. This is the one that says, “If you only pay the minimum your balance will be paid off in 74 years.” Kind of scary right? With a consolidation loan, you have a set time, usually 2-5 years, where you make payments to get rid of the loan balance. This makes the debt a little less scary.
The fees charged for the service can be low
Often times the fees for this service are low. The bank is usually happy to get all your business, meaning own all your debt. Many will bundle the fee right into the loan which makes it easier to pay off. This will make your life a little easier.
You only have one monthly payment to worry about
This is one of the better features of the debt consolidation loan. If you have random debts all over the place, you can find it hard to keep up with all the payments coming out at different times of the month. With the loan, you can have one easy payment made on the same day every month. It makes it easier to keep track of and it is an amount that is almost always lower than the sums of all your original payments.
You can consolidate at a lower interest rate
The hardest part about paying off certain debts is the interest rate. Credit card debt especially has insane interest rates that make it almost impossible to pay off if you have a high balance. Debt consolidation lowers your interest rate into one manageable payment, often saving you money. If you are paying 19%-23% interest on a credit card balance, the consolidation loan might be your best bet to get rid of it.
What is Financial Independence? – Budget Boss
Negatives of debt consolidation loans
You need a good credit score
To get a debt consolidation loan with a reputable institution, you will need a good credit score. You might be thinking, “Well if I had good credit I wouldn’t be in this mess.” That is why it is important that even if you are in debt, to pay your monthly minimums. Not paying your monthly minimums hurts your credit, which in turn can hurt your chances of getting out of the debt. Nasty cycle isn’t it? If your score is bad you might have to resort to less reputable carriers to consolidate. You know those debt-guys you see on billboards or in cheesy commercials. You don’t want to have to do that.
They require collateral
Most financial institutions won’t just give you a debt consolidation loan out of the goodness of their hearts. They want you to have something or someone to back it up. This can include investments like an RRSP, physical items like your car or home, or even a person that will co-sign for you. They want to know that if you can’t pay off this loan, you won’t default on them. You see how debt hampers your options in life?
Interest rates on unsecured debt consolidation can be high
If you do not have collateral, you might have to pay a very high-interest rate for your debt consolidation loan. It might feel like it defeats the purpose, which it is why you should always ask questions when making this move. If you can’t meet monthly minimums it still might be your best option. It could prolong the payments but lower the monthly amount due. Make sure you do the math when you apply.
You may lose your credit cards
Now, this might not seem like a bad thing at all for those of you who cannot control your spending. In fact, many of you should chop up your cars immediately. For others who have learned their lesson, losing your ability to use a credit might not be good. You might have to go the “secured” credit card route afterward until you have established you are a good borrower again.
Pros and Cons of Debt Consolidation – Money Crashers
The point of this post is simple. Those of you who are in debt need to understand that knowledge is your friend when making financial decisions. You must know that your debt is a product to the financial institutions. While it might seem like they are doing you a favor, they are not doing it because they love you. They are doing it because it makes them money. How it makes them money is because now they own your debt, for which you pay interest. That is why you must fully understand what you sign up for when you get a consolidation loan. It is entirely possible to be in a worse position than you were before because someone took advantage of you. Don’t get hurt by a wolf in sheep’s clothing!
Thanks for tuning in today as begin Loan Week here at Budget Boss. Don’t forget to tune in tomorrow as I jump into the messed up world of Credit Cards. If you have questions regarding loans and debt, please do not hesitate to contact me at joe@budgetboss.ca. Have a great day Bosses!
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“Rather go to bed without dinner than to rise in debt.” – Benjamin Franklin
Email – joe@budgetboss.ca
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