You’re deep in a car loan, credit card loan, and other types of debt. Minimum payments aren’t having much effect in reducing your debt, and you’re worried. It is evident that you can’t reach your financial goal this way, and you’re seriously considering debt consolidation because it promises a small interest and easy payment.
But Dave Ramsey is of the opinion that even though debt sucks as you can see in the baby steps method, debt consolidation may just suck even more. Check his video talking about debt consolidation.
One major reason why Dave Ramsey is of that opinion is that debt consolidation only clears a small portion of your debt. As a matter of fact, you might pay more and stay in debt for a longer period if you apply for debt consolidation. There are pros and cons of debt consolidation. You can also see that Dave Ramsey has specific views on bankruptcy if you are facing such a financial hardship that nothing else works.
Before I go further, please note that Dave Ramsey does have a different view on student loan consolidation.
Let’s go into more details of debt consolidation so that you can have a better grasp of the debt relief method.
What is debt consolidation?
Debt consolidation is the act of borrowing from creditors to offset consumer debts and liabilities, which are generally unsecured debts. It combines multiple debts into a large and single debt with a highly beneficial payoff term.
By favorable payoff terms, we mean a reduced monthly payment, reduced interest rate, or even both. Debt consolidation is a perfect tool used by consumers to deal with credit card debt, student loan debt, and some other liabilities.
If you’re seeking a debt consolidation debt relief, then you should apply for one through a credit card company, bank, or credit union. This can be a very great place to initiate the process, especially if you have a long-standing record of prompt payment with them.
Is Debt Consolidation the same thing as Debt Relief?
Many people use debt consolidation and debt relief interchangeably, but there is a difference between debt consolidation programs and debt consolidation loans.
According to expert Ben who is the CEO of Ascend Debt Relief, “unfortunately many companies use fake debt consolidation loan mailers to bait and switch people into debt relief programs. Thankfully, the CFPB has caught onto some of these tactics lately and recently sued Strategic Financial Solutions.”
How does debt consolidation work?
As defined above, debt consolidation combines numerous debts to make a single loan—usually, with a slightly reduced interest rate. Debt consolidation is designed to lower your overall repayment cost, adjust your period of repayment, and make your monthly payments simpler. For example, you may negotiate for a longer payment to reduce your minimum monthly payment, but it’ll raise your interest rate over time. However, even though debt consolidation enables a convenient monthly payment, it has its own disadvantage. You will wind up with more debt than before if you’re struggling financially and you have difficulties living without using credit cards.
Some common debt consolidation options include balance transfer cards, debt consolidation loans, and some types of secured loans such as home equity loans, and secured personal loans.
Have this information in mind:
- Your new loan’s origination fee: You will definitely be charged a fee before you can get a debt consolidation loan. This fee is best described as a prepayment penalty, which is usually a small portion of the remaining balance on your loan. It’s not all creditor that’ll ask you to pay a prepayment agreement—as such, you should go through the details of any document you’re to sign.
Let’s properly elucidate on why Dave Ramsey says debt consolidation sucks.
Let’s assume that you have two high-interest credit cards. One of them has a balance of $3,500 and an APR of 26.5%, while the other has an APR of 24% and a balance of $2,000. Let’s assume that you’re only required to make a minimum total payment of $220 monthly. However, if you consolidate your credit cards into a single lower-rate debt consolidation loan, you can pay your debt earlier and end-up saving on interest. In such an instance, you should make use of debt consolidation, provided that you have the discipline to avoid using the old credit card in the cause of paying off your consolidated loan.
But most people do not qualify for a lower APR as they already have a bad credit score. So in my own opinion, whether debt consolidation sucks or not depends on your credit score.
Ways to get out of debt
Getting out of debt when you’re neck-deep in it isn’t easy, and that’s especially true if you don’t have a money tree at the back of your house. Fortunately, there are easy ways to get out of debt without being miserable. Some of them are:
1. Pay above the minimum payment mandated
An effective way to expedite debt reduction is by paying above the minimum amount required from you every month. Most debtors pay only the minimum payment, but this is usually designed in a way to ensure that the creditor gets as much as possible from the loan.
2. Transfer balance to a 0% APR credit card
Approach your financial service provider and request for a new card that extends 0% APR on balance transfers, and transfer your debt to this new card. Some cards in this category will allow you to avoid interest between a period of 9-21 months. This way, you can avoid paying interest for a while, and commit as much as you can towards settling your debt.
3. Have a monthly budget One of the most proven ways to get out of debt is by creating a monthly budget. A monthly budget allows you to track your expenses so that you can identify and get rid of any source of wastage. Although making a budget is not an easy task, you can make use of budgeting apps and debt payoff apps to make the task easy.