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Hi there, Michael Bovee with Consumer Recovery Network.
Thanks for tuning in to our YouTube Channel, DebtBytes.
Today, I'm going to continue on with our pros and
cons series and the topic is Debt Consolidation.
Typically debt consolidation for most of us,
it's understood to be a loan.
Often times, people might consider using a balance
transfer, as a form of debt consolidation as well.
What types of loans?
Well, loans you might get from your bank, a personal loan, or
a peer to peer loan, or even a home equity line of credit.
Those are coming back.
After the recession, we didn't see as many of those, but
they're more common.
So when you're taking out a loan,
you're typically going to be paying off multiple accounts.
So let's get into the pros and
cons of that type of debt consolidation.
Okay, first off, the main purpose of consolidating your
debt is to lower your interest rates.
So let's assume, for a moment, you have five credit cards and
the average interest rate is 17% and
you can get a home equity loan and pay 6%.
The benefit there is obvious.
In the case of, say a balance transfer,
some of those interest rates could be fantastic, right?
You can get intro rates that are 0% or relatively low,
lower than 5%.
And if the balance that you have available to use and
transfer other debts onto that is large enough, you
might be able to whack out all of your other unsecured debt,
say those five credit cards again.
So that's a pretty real benefit as well.
Okay, so moving on to another pro is simplification, right?
And it's because you only have one payment now.
If you're consolidating five credit cards into one loan,
just paying them all off and now you just have the one loan and
only one payment to make.
It's less to keep track of, it's less things to worry about, ACH
payments from your bank account or keeping track of things.
In other words, the simplicity is a benefit.
Okay, now another pro and it will depend on who you are and
how stretched your finances are, but
the preservation of your credit, of your credit score, or having
nothing happen to any of the trade lines on your credit is
a huge benefit to consolidation and let me explain.
When you do alternatives to debt consolidation to manage,
if you're in a tight spot and
you absolutely are doing this to get the lower interest rates,
otherwise how are you gonna afford your bills.
Well, the alternatives like bankruptcy that hurt your
credit, debt settlement obviously hurts your credit,
even debt consolidation through, it's a different type
of debt consolidation, through a credit counseling agency and
non-profit, they actually close your accounts.
In that regard, it doesn't really hurt your score or
credit counseling, per se, but
it's on your report that you're on a managed plan, and
it can prevent other options, other financing options,
at least for a little while when you're on one of those plans.
So, debt consolidation loan
is probably the best way to manage that debt situation and
get a better interest rate and have it preserve your credit.
All right, so another benefit is a fixed pay off, right?
So, assume for a moment that you're doing this correctly and
you are taking those five credit cards for example and
you are combining them into one payment.
And now, that fixed loan is not something that revolves,
where you can use the credit card a month to pay some and
then use it some more the next month and then pay it off and
the balance fluctuates and the minimum payment fluctuates.
In a traditional consolidation loan, it's gonna be a fixed
payment and that gives you a fixed time to pay it off.
So there's a great deal of benefit in that,
in predictability and so forth.
So that's also a pro.
Okay, balance transfers, I mentioned briefly and
I wanna mention them even more now as a pro.
In that there's a lot more flexibility in balance transfers
because banks do compete for your business.
Once you've done a couple of these consolidation types of
events through balance transfers though,
it starts to look like you're playing musical chairs.
So, I'll get to more of that in the con.
Very specific to balance transfers.
But at least in this context where you have more
options, banks competing for your business, those balance
transfers could be seen as a pro, depending on who you are.
Okay, so on the con side, one of the biggest problems, and
it depends on who you are, but for me, from my perspective of
communicating with consumers for almost 20 years on problem debt.
I just see this so much that it's, for
me, the first thing I wanna point out and
don't be this person if you can avoid it.
You might already be when you are watching this video.
You do the balance transfers or the consolidation loan and
you don't close those other accounts and I get it, but
you start using those other cards.
They were paid down to zero and suddenly now you've got those
racked up, those charges, and the minimum payments that
are now again, stretching your budget thin.
And you don't have that flexibility anymore in your
budget, because you have one consolidation loan that you're
paying the minimum payment on every month and now you've got
the credit card bills on top of it, so it's compounded.
Your earlier efforts to consolidate your bills,
needing to do it again and not have a lot of options, okay?
So be very careful on that con.
I see it a lot more with balance transfers of old and jumping
from one card to the next, so let me get to that right now.
Balance transfers are usually at an intro rate, okay?
So it's not like you get this consolidation balance
transfer loan type of product, and it stays at that low,
low teaser interest rate, for the lifetime of the balance.
Usually it's like a year.
Okay, so, you transfer all your balances over there, and
everything's affordable because it was an intro rate.
It was 0%, it was 4%, 2.9%, and then in the 13th month,
it goes up to 11% or 9.8% or something like that.
And suddenly now that's not within your budget.
I've seen it happened even
worse higher interest rates that they revert to.
So, or you missed a payment accidentally and
now the intro rate is gone, right?
So these balance transfer changes or
these intro rates are only temporary.
The person who has a consistent income, very fixed and
is able to do and afford their bills,
doing a balance transfer and then at their Christmas bonus
that they know they get every year or
they get their tax refund and they pay that stuff down.
Fine, okay, but if your income is not consistent, if your
spending is not consistent, if you have unexpected expenses
come up and you start using those cards again, those balance
transfers are usually a stop gap type of measure
at a critical point where you change your behavior as well.
So these debt consolidation things are a great tool
along with some tighter budgeting, often enough,
and/or some behavior changes and some spending changes, okay?
Be careful of the balance transfer boogie.
In fact, I have a post up about it.
Okay, another con for consolidation loans and
balance transfers and what not is you have to apply for
these things, these other accounts.
And you have to get approved.
So if you're already stretched to a place where
your interest rates aren't affordable,
it could very well mean that your debt to income ratio,
your credit utilization on some of your accounts that you're
trying to consolidate, are so high that you won't qualify.
So that's an impediment to being able to consolidate in the first
place, so be careful.
Okay, so, pretty simple list for consolidation loans and
balance transfers.
Thanks for tuning into our YouTube channel.
I'll see you on the next video.
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