Is Debt Consolidation for you?

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Are you wondering what is the best debt pay-off strategy? If so, keep reading to find out if debt consolidation is for you.

The end of the month is coming up and your loan payments are due. Your credit card balance is high, and your payments aren’t making a dent. The minimum payment is just as high, and you can’t afford to pay more. If you have a lot of debt, you might be looking for an escape. You’re trying to pay the debt, but the interest is also high. Any kind of relief would help. Wouldn’t it help if you could pay all those debts in a single payment without worrying about the interest? Debt consolidation could be the answer you’re looking for.

In this post, we’ll help you decide if debt consolidation is for you, and how do go about.

What is Debt Consolidation, and Why Does it Matter?

Debt consolidation is combining multiple debts into a single loan, meaning one payment. These debts can be combination of several different types of debt.

 A lender, such as a bank, would loan you money to pay off other debts, making them your only debt. This loan would have a set number of payments and a clear end date; referred to as an installment loan.

The intent is to make your debt easier to manage, and your payments simpler. If you can only afford to pay the minimum, your normal credit card balance would take years to pay off. But minimum payments on a structured loan would have no ill-effects. For a little more details on the functionality and purpose, dive into the weeds in this article, Debt Consolidation from Investopedia.

The peace of mind from making one monthly payment instead of five, is one of several benefits from debt consolidation. Like we mentioned, when you consolidate your debt, the payments are structured over a set number of months. This means the loan’s interest will not make your loan get any bigger. Additionally, when you consolidate credit cards, the decreased credit card balance would help increase your credit score.

Debt consolidation isn’t to be confused with “debt settlement”. With debt settlement, the lender agrees to accept less than the full amount to satisfy the debt. This can be cheaper but requires much more cash on hand. Due to many settlement company’s practices, most clients score drop over twenty points. You can learn a little more about the differences here.

How does debt consolidation work?

Almost any bank or credit union will offer debt consolidation. Lenders will often offer promotional deals on debt consolidation loans around the Christmas time, when most people use credit cards. Many people will even take out personal loans to buy gifts for everyone. To avoid high interest rates, you should ask your regular bank what debt consolidation loans they offer. It may not be as low as a car loan, but you will at least have a relationship with them.

When a lender agrees to work with you, they will do one of two things:

1. Give the money directly to you, so you can pay your creditors.

2. Ask for your most recent balance statement so that they can make the payment on your behalf.

Some lenders will give you the money to pay your own balance. This is usually done with a nationwide lender because they can afford the risk. Plus, you already signed the loan paperwork with the new bank, so you are required to pay them.

This is not always the case with smaller lenders. When you are dealing with a local bank or credit union, they may pay your creditor directly. This way there is no question where the money is going. They will use your most recent balance statement and mail a bank check to the address on your statement via certified mail.

What are the benefits of debt consolidation?

One of the greatest benefits is the loan is structured, which means it has a specified end date. On average, when you pay the minimum balance to credit cards, it would take several years to pay off the full debt. But with consolidation loans, you structure the debt to pay within a specified time, like car loans. So, you don’t have to feel stressed, like you will never escape this debt. Don’t worry, there is a light at the end of this tunnel.

When you have various kinds of debt, you make multiple payments each month; one to your car loan, one to your student loan, and maybe more than one to credit cards. In most cases, these bills are due on different dates. When your debt is consolidated, you have a single payment to a single lender. That’s one payment, versus five.

Ideally, when you consolidate your loans, it’s to make the monthly payments easier. So, the monthly consolidation payment should be lower than the total amount of individual loans you had before. If you’re paying more each month for the consolidation loan, it’s not really making it easier. If the lender is telling you that the consolidation is a promising idea, even though your monthly payment is higher, find a different bank.

When you consolidate your loans, the total interest is typically lower than your current payments. If you’re offered a consolidation loan with 18%, that’s still better than paying credit cards with 20% or more interest across multiple loan. If the interest rate is lower, that means you will save money by paying less on interest.

What debt am I allowed to consolidate?

When it comes to deciding which debts to pay, any legal debt can fall under the debt consolidation. Whether it’s a student loan, medical debt, or your sister’s credit card. At the end of the day, the bank will be the one to accept the risk. If you want to include a specific debt, you’ll need the paperwork that shows the debt is from a legitimate lender, even if the debt wasn’t yours to begin with.

Yes. You can technically pay someone else’s debt with your own debt consolidation loan. Most experts don’t advise this because you are taking on someone else’s burden. But it’s technically allowable.

What debts am I not allowed to consolidate?

Typically, banks or credit unions will not consolidate loans if they don’t know whether the debt is real. So, if you don’t have a balance statement, or any official documents saying this is a real debt, the bank or credit union won’t want to include it in the consolidation loan. If the debt is small enough (less than 5% of the whole loan), they might make an exception and give you the money so you can pay. But it may take some smooth talking and an empathetic bank rep.

Debt Consolidation isn’t for everyone. It’s not even right for every situation. Sometimes, the best decision is to pay the loans to a lower balance and then ask for a consolidation. You don’t want to be stuck with a higher monthly payment than before.

Check out my Financial Wellness Services to help you start your wealth-building journey. e and for all.

Meet Luzy

Luzy King is an award-winning Latina Wealth Coach. She became a first-gen investor after learning about investing and wealth building by accident through her MBA program in 2019. During the same year, Luzy was denied access to financial advice because she didn’t have $100K to start investing, and she made a commitment to learn things on her own and become the first one in her family to start investing. Now she is passionate about teaching women of color all of the strategies she wishes someone would have taught her in school. Luzy is a certified trauma-informed Financial & Business Coach, contributing author, and Community Leader. Luzy is on a mission to destigmatize the idea of wanting more money, more money more options. She is ready to teach women of color how to build a legacy through stock market investing and entrepreneurship. 

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