Top Concerns With DEBT CONSOLIDATION. Is Debt Consolidation Right for You?

When you're looking to get on top of your credit card debt, you might consider using a debt consolidation loan. I've seen a lot of legitimate concerns about debt consolidation and some less than legitimate concerns. We've spent years in the lending industry. We track dozens of lenders and we have studied thousands of people's personal financial lives. Today, I want to walk you through some of the most common concerns about debt consolidation so you can determine whether it would be good for your situation. You're just trading one debt for another. On one level, yes, that's exactly what you're doing. You're trading your credit card debt for an installment loan. Debt consolidation doesn't automatically get you out of debt, but this complaint misses the underlying point. You are trading one kind of debt for a different kind of debt. You are trading a type of debt that has a variable payment for one that has a fixed payment. The installment loan forces you to maintain a consistent monthly payment, which will accelerate your principal pay down over time. Consolidation will cost you additional fees. This is only true if you don't compare the annual percentage rate of the debt consolidation loan with the interest rate of your current credit card debt. The astute viewer will notice that we are not comparing APRs with APRs or interest rates with interest rates. The reason for that is that the APR includes the interest rate as well as any fees that you can't avoid. So if the APR for the debt consolidation loan is two to three percentage points lower than the current interest rate of your debts, you're good. It means that any fees don't make the cost of the loan exceed the current cost of your other debt. Consolidating doesn't solve your underlying financial issues. Of course, this is absolutely true, but that doesn't mean it's a reason to avoid debt consolidation loans. Debt consolidation loans are a tool, not a philosophy. If you fail to fix the financial issues that caused your current debt, it doesn't matter if you use debt consolidation or not. But there's another way to look at it. Honestly evaluating whether debt consolidation would be good for you is a great way to do the work that helps you address your underlying financial issues. I probably won't qualify for a good debt consolidation loan. It is true that there is no guarantee that you will be approved for the debt consolidation loans that you want, but there's no downside to applying. All of the lenders that we track only do a soft credit check when you apply. There's no reason not to see what the companies will offer you. You don't have to take any of the loans, but you won't know what you can qualify for if you don't apply. Consolidating will just add another hard inquiry to my credit report. If you do take a debt consolidation loan, it will put a hard inquiry on your credit report. A hard inquiry can decrease your credit score 10 to 15 points for two or three months. The only reason it wouldn't rebound is if you continue to have hard inquiries over an extended period of time. But incurring a hard inquiry is not a reason not to apply for credit. It's just a side effect. If the credit will improve your financial situation, you should do it. It could raise my interest rates. If consolidating your credit card debt would raise your interest rates, don't consolidate. No one says you have to accept a loan that you've been approved for. Getting a loan that you need is crucial to deciding whether to consolidate your credit card debt. That's why we always recommend that you shop around. If you can, you should get two or three offers before you decide to take a loan. This will ensure you're getting the best deal that you can in your circumstances. At the UConn Project, we've tried to make shopping around easy. If you visit our marketplace page, you can focus your search on lenders who offer debt consolidation loans. You can then apply to any one of the featured lenders. Behind the scenes, we will check your rate with up to 40 other lenders. Our partners will use a soft credit check, so applying won't hurt your credit score. We will show you all of the approved offers so you can make sure that you pick the loan that's best for you. Consolidating may encourage more spending. Consolidating your credit card debt doesn't change your behavior. If you know you have a spending problem and think that freeing up your credit card will lead to more spending, you should focus on fixing your spending problem first. Consolidating can play a positive role in improving your financial situation, but it isn't a magic bullet. You still need to do the other things in your life that will help you make the positive and permanent change that you need in order to get on top of your finances. Debt consolidation could be a good tool for you in your effort to get out of debt, but it might not be for everyone. We hope this video has helped you better evaluate whether debt consolidation would be good for you. If you found this information useful, please like this video and subscribe to our channel. Thanks for watching.