Debt Consolidation Loans
Debt is an interesting word. For most, debt can create a varying degree of stress; monthly payments, auto loans, student loans, personal loans (including unsecured personal loans), credit card debt, medical bills, loan payments…these are all types of debt that add up to the monthly equation of money coming in and money going out of your bank account. And those are just a few examples!
The good news is that, if you are in debt, you’re not alone. By some estimates, almost 4 out of 5 Americans owe some kind of debt, and the total amount of debt (including unsecured debt) in this country is in excess of $14 trillion. This means that close to 80% of the people you see out and about throughout your day carry some kind of debt that they’re working to pay off.
The better news is that Delmar Mortgage remains committed to being Right by You. If you are serious about taking the next steps in your life and working towards financial freedom, let us work with you to identify strategies, loan options, and tools you can use to one day become debt-free and own the home of your dreams!
There is also a certain amount of credit to be given to you for even reading this article. If you have ended up on this page, it signals that you are serious about bettering your financial circumstances, and recognize that you want to make a positive change in your life. That alone is a lot more than most people do, and you should be commended for taking some initial steps to get your life back on track!
There are a number of different consolidation loans, and different reasons and considerations for those who might want to take out a debt consolidation loan for themselves. In this article we’ll break down what these loans are, who they are for, why someone would want to take one out, and a few other FAQs and considerations.
What is a
debt consolidation loan?
A debt consolidation loan is when a lender like a bank or a credit union consolidates various debts of a borrower into one monthly payment as a new loan, rather than a number of smaller loan payments. In other words, debt consolidation allows you to pay off multiple debts with a balance transfer credit card or a new loan, sometimes with a lower interest rate. Looking to the examples earlier in this article, imagine bringing your monthly payments for your credit cards, house, car, student loans, medical bills, unsecured debt, personal loans, and other debt payments under one fixed monthly payment. This has to factor for principal payments, fixed interest rates, and other factors. The benefit is that you don’t need to worry about whether or not autopay is turned on for a car, or whether or not you’ve paid off some of your credit card this month – in fact, some consolidation loans even offer a lower interest rate for qualifying debt! With everything under one umbrella, you can rest assured that each month you’re paying off parts of all of these types of debt through one single payment.
What should I think about when considering a consolidation loan?
A handful of the considerations you’ll want to evaluate are repayment terms, eligibility requirements, and APR (annual percentage rate). Ideally, you’ll also want to consider using a lender that allows you to qualify online, so that you can do things like checking your rates without needing to worry about any impacts to your credit score (though you may need to identify whether you have good credit or bad credit, as well as your credit history). You could additionally get a credit report, which is a soft inquiry (instead of a hard inquiry) that won’t affect your credit score. Each lender will also have different repayment terms, which you should read thoroughly and consider.
You’ll want to evaluate your debt-to-income ratio (how much money you bring in each month vs. how much debt you owe and have to pay into each month) and speak with your partner to develop a debt management plan with a credit counseling agency to get you out of debt and into a financially stable place in life. You’ll want to consolidate your high-interest debts into a loan with no origination fees or a prepayment penalty. Additionally, taking out this loan may result in the repayment information and your credit profile being reported to relevant credit bureaus.
What are some of the
benefits of a debt consolidation loan?
- Consolidated finances – Combining all of your debts into one loan minimizes how many payments and interest rates you have to think about every month. This can also better your credit by lessening the opportunities to miss a payment or make a late payment. As you work towards a life without debt, you’ll be able to forecast when your debts will be paid off.
- Possible faster payoff – If your new debt is accruing interest at a lower rate than all of your individual loans were, you can use the money you save to pay off your loans even faster. This strategy can actually help save even more money by paying the loan off faster with less interest owed down the road. Most consolidation loans however have longer or extended loan terms, so you’ll want to intentionally pay as much as you can afford every month, early and often.
- Might results in a lower interest rate – Depending on whether or not your credit score improves since you applied for different loans, its is possible to lower your interest rate through consolidating debts. This will save you at least some money during the life of the loan, especially if you don’t have a loan term over a long period of time. It is worth noting that different types of debt have higher interest rates comparatively speaking. Student loans usually have lower fixed rates than credit cards, for instance. An ideal plan would allow you to merge all of your debts into one loan with the lowest rates of interest possible. It is worth noting that every case is different, and while companies can give you an idea of what your personal loan rates might look like, the actual amount you’ll have to pay will be completely contingent upon your personal circumstances.
- You might have a smaller monthly payment – In general, your total monthly payment should be smaller because you are extending all of your payments over a longer period of time. Though you’re likely to save money each month, you’re likely to pay more during the life of the loan, even if you have a lower interest rate.
- This could better your credit score – While the new loan application might drop your credit score temporarily (due to the hard credit inquiry or credit check), a debt consolidation loan can help you improve your credit score over time. As you pay off your different lines of credit (like credit cards), you’re likely to lower your credit utilization ratio. The name of the game is to make payments when they’re due, consistently, while you work to pay off the debt. If you stay consistent, before you know it you’ll have excellent credit.
What are some of the
cons of a debt consolidation loan?
- There may be some additional costs – It is possible that taking on a debt consolidation loan may include some extra fees. Some of these fees include annual fees, closing costs, origination fees, balance transfer fees, and more. Speak with your lender and take pains to be sure you fully comprehend the total and true cost of your loan before going through and authorizing any documents.
- A debt consolidation loan might result in higher interest rates – If you can get a lower interest rate, a loan like this can be a good idea for paying off debt. But, you do need a good credit score to qualify for a lot of the more competitive rates, and if you don’t, you may end up with a credit rate that’s even more expensive over the long term than your current debt. You’re also more likely to pay more interest fees throughout the life of the loan.
- More interest over more time – Just because your interest rate is lower does not mean you won’t pay more over time with your new loan. After the start of the loan, your timeline for repayment starts that day and can last as long as five years or more. While your month-to-month payment may be less, the amount of fees you’ll pay in accrued interest will be greater for more time. The easiest way to avoid this is to simply pay more than just the minimum loan payment – the more you pay early and often, the shorter the loan and interest accrual period will be.
- Missing payments can have consequences – One of the worst things you can do for your credit score or any kind of loan is to miss a payment. At the very least, you will likely receive some additional fees. Consistency is the name of the game, and routine on-time payments are the easiest way to pay off your debts as quickly (and cheaply) as possible. Every month, you should check your budget and make sure that you have more than enough money to allocate towards the new payment. A great tool is autopay which will automatically take money out of our account on a predetermined day and prevent you from missing a due date. Worst case scenario, if you think there’s a chance you could miss a payment you have coming up, try to speak with your lender to provide them notice. You may still be assessed fees, but having everyone on the same page can be critical towards ensuring you work towards the finish line.
- The loan won’t resolve the original financial issues – Humans are creatures of habit, and one of the worst habits we have is spending money we don’t have. Credit companies and other groups know this. One of the worst things one could do would be to consolidate their debts but not change their financial habits, meaning they actually end up in even more debt. Before taking on a loan like this, one should think about researching and implementing good financial habits before consolidating their debt. That way, the change won’t seem so difficult all at once. The best part is that, once the debt is paid off, you’ll be so used to your good financial habits that you’ll actually be able to start saving up some money and investing your funds for future use!
- You may be tempted to spend even more – It is really easy to take out a debt consolidation loan, and then feel like you have access to more money or lines of credit than you actually do. Sometimes borrowers will pay off their debts, then find themselves racking up debt again over time. Look at consolidation as an opportunity; if amassing debt feels like falling into a hole, consolidating that debt and paying it off over time is your way of climbing out of that hole. Setting yourself up for success with good habits is your way of preventing yourself from falling back into that hole after you have finally climbed out.
Starting to feel a little overwhelmed? We get it – this is a lot of information about a very difficult topic to discuss. But by taking some time to think about these kinds of consolidation efforts, you are collecting information that can help you make the best decisions for you and your family.
Is a debt consolidation loan
right for me?
These kinds of loans can be good for borrowers paying multiple loans with high interest rates. This usually only works though if your credit score improves since you applied for the loans you originally took out. If your credit score isn’t high enough to qualify for a lower interest rate, it may not make sense to consolidate your debts.
None of this will be worth it though if you don’t assess the roots of the problems that resulted in your current debts and loan amounts. Overspending, not sticking to a budget, and poor financial habits can all result in you ending up back where you started. Just because you finally pay off several credit cards through a debt consolidation loan does NOT mean you can spend freely again, and can actually result in even worse financial situations and problems later in life.
At this point, you may be wondering if you could consolidate all of your debts (including credit card debt) into a new mortgage with a home equity line of credit. Let’s review what this looks like.
What is a
home equity loan?
A home equity loan is a different way to consolidate debt and mortgage refinancing. This type of loan basically acts like a second mortgage permitting you to borrow from the equity built into your home, without concern for closing fees or other costs one might associate with the home-closing process. The total amount of your loan is calculated from the difference between your house’s current value on the market and the balance due with your mortgage. These kinds of loans are often fixed-rate, whereas alternatives like home equity lines of credit (HELOCs) usually come with variable rates.
These loans are sometimes a good method to turn the equity you have built into your home into cash, especially if you have made investments like updates or renovations into the house. One major consideration though is that your home is technically at risk, meaning that if the real estate value drops over time, you might owe more than the house is worth. You may also need to consider whether or not you want to move in the future. If you decide to change your location, you might lose some money from the sale of the home, which could prohibit you from moving.
As we mentioned before, it is mission-critical not to rack up more credit card (or other kinds of) debt. The initial relief can make you feel like you have a lot more money at your disposal than you actually do. We again recommend you work towards establishing healthy and sustainable financial habits before taking out a home equity loan, or any other kind of debt consolidation loan for that matter.
Who can provide a
home equity loan or debt consolidation loan?
There’s a handful of companies that have better loan offers than others. Companies like Sofi and Upstart for example are two entities with decent track records at helping borrowers overcome debt. Whoever you go through, you will want to read the fine print to be sure the group you go with has a few bases covered; be sure there are no fees for things like paying extra amounts early, and that your institution is a Member FDIC institution (this means that the financial institution is compliant with the Federal Deposit Insurance Corporation, which is a federal agency that helps to protect clients of insured banks from losing their deposits if the insured banks they use fails). You’ll also want to be sure that any company that you refinance a mortgage through is an equal housing lender, with a trackable NMLS (Nationwide Multistate Licensing System) identification number.
This is all to say that, for every good and solid company out there ready to help you pull yourself out of debt, there are also predatory groups that give you offers that look perfect at the start but could result in you paying significantly higher fees or worse.
Let’s take a
Let’s be honest for a moment. These kinds of conversations and considerations are more than just a little stressful. Oftentimes they’re the kinds of conversations one would rather avoid altogether, and that avoidance actually results in even more debt! Facing the reality of your financial situation can be difficult and scary, and requires a little courage. But we would encourage you to go back to the statistic from the top of the article; almost 80% of our country is in some kind of debt. Certainly there are some people who owe less than you, and definitely there are people who owe significantly more than you. You are not alone.
Being in debt is not the end of the world. Think of it like a state of being; it might be your current situation, but that’s certainly not to suggest that you will be in debt forever. In fact, with the right plan, some discipline, a dash of courage, and the right dedicated team behind your back, you can work yourself out of debt in no time!
Delmar Mortgage comes in.
Delmar Mortgage remains committed to doing Right by You. We are your neighbors, working in and around your community, doing all we can to put your best interests first. That might start with a mortgage loan, but it can and should be a shared commitment to your success both today and 20 years from now. For over half a century Delmar Mortgage has worked towards the health, happiness, and success of our employees and our customers.
Our industry is one that is complicated and constantly changing. We strive to be the guides in an otherwise difficult situation to navigate, helping you get from where you are to where you want to be.
You have likely heard of companies refer to themselves and their customers as being “one big family.” It is certainly one thing to claim that – it’s another thing to prove it. Helping you get out of debt is one way in which we can directly help you to get to your goal line, whatever that looks like for you. We want you and your family to be happy, healthy, and safe in your home, with the knowledge that the decisions you make today will directly contribute to your success in the future.
That’s what it means to be Right by You. Our growth and business success is a direct result of our clients trusting us to help them make the best decisions possible for their homes, finances, and families. But that growth doesn’t mean that we won’t provide the kind of personal service our clients have come to expect – not by a long shot.
Whether you want to look into buying a home, refinancing your home, or even consolidating debt into a home equity loan, we have a dedicated team of industry experts ready and willing to help you along the way. We understand that the conversations and decisions made with our team have real-life implications for the futures of every family we serve, and we do not take that obligation lightly.
Whenever you are ready to take the first step towards financial independence, make sure we’re the first group you call. We will be happy to evaluate your finances and debts from start to finish, and we can discuss our loan rates and requirements that can compete with any rates around. Knowledge is power, and the better the understanding you have about your situation, the more you can move forward with confidence knowing every step you take will be one in the right direction.