If you didn’t already know, I have a lot of debt. When Mike and I combined our finances, he had a small car loan, and I had a monstrous amount of student loans- $38k to be exact. Do you know how it feels to sit under that kind of crushing debt when you’re just starting out?
If I was making better money, I don’t think I would worry about the debt so much. However, I have a Communication degree, and Mike is a Veteran with no higher education. Let me tell you… It’s hard out here. Add in the recent costs for a wedding, and we cannot help but feel like we’re drowning. We are paying above the minimum on most of our debts, but with so many bills, it feels like we will never get ahead.
Enter loan consolidation. It comes in so many shapes and forms. It’s different for everyone. How you feel about loan consolidation can depend on where you’re at in your life. Some financial gurus will tell you to stay away from it. They’ll tell you to find a way to make more money or cut more expenses, but we all know that sometimes, it’s just not possible no matter how hard we try. So let’s start with the basics.
What is Debt Consolidation?
Debt consolidation is when you use a bigger loan, usually with a lower interest rate and longer pay-off period, to pay off other higher-interest or riskier debt – like credit cards and private student loans.
You are probably most familiar with the consolidation of student loans. With so many graduates leaving college in massive debt, loan consolidation is typically the first place they look for relief. For example, my federal loans are consolidated. They have a low interest rate, and I’m really not concerned with them right now, as the payments aren’t high. Before I consolidated, the payments were going to be $500 a month for 10 years. I had 6 separate federal loans, in addition to three private loans I had taken out. There was no way I could handle the payments in my financial state two years ago. Consolidating my federal student loans put me on a longer term with lower payments and a lower interest rate, giving me more time and money to invest in my future. (Disclaimer: I know I’m paying more interest in the long run, but I’d rather not be homeless, and Mike and I have started our journey to begin paying our debt off FAST.)
So how do you decide if consolidating your debt is right for you? Ask yourself these questions:
Do I Qualify?
If you have bad credit, you may not qualify for a consolidation loan. Check around and see if there are any offers available to you. If you have a credit card, start with that company first, as you already have a working relationship with them.
Is the Interest Rate Offer Lower than my Current Rates?
Maybe you do qualify, but the interest rate isn’t as low as your current rates. Unless you are approved for a lower rate, it would make little sense for you to take out a consolidation loan. It will cost you so much more in the long run.
Can I Afford the New Payment?
Most likely, your new payment will be less than the combined payments you are making now, so this shouldn’t be an issue IF you don’t accumulate more debt. You do NOT want to be paying on a consolidated loan and creating more debt for yourself. That defeats the whole purpose!
Can I Commit to Paying this Debt Off?
You do not want to consolidate your loans if you cannot commit to paying it off early. In order to achieve financial freedom, you must pay off the debt as quickly as possible, even if the interest rate is lower. You’re still paying interest, which is never a win. Ensure you have a plan to pay the loan off as fast as possible.
So, is consolidating debt right for you? Only you can answer that question. If you need financial relief and actually have a plan in place on how you’re going to get out of debt and stop spending money, then debt consolidation may be right for you. If you’re going to use it as a way to spend more of your income on wants, I do not recommend this strategy, AT ALL.
Have you ever consolidated loans or credit card debt to achieve financial relief? Let me know below!