Debt consolidation is a good thing. Most of people hear “debt consolidation” and shudder at the idea. But I’m not sure if they’re shuddering at the idea of having to do it or the fact that they have incurred so much debt that a debt consolidation is a good idea. I was a loan officer and sold debt consolidation loans for two years, so I feel like I’ve seen it all. Despite the appearance of debt consolidation loans being beneficial only to the lender who gives the money, it’s a loan created to help the consumer. And it does. The most beneficial debt consolidation loan is a mortgage, as it gives the most flexibility.
However, in order for a debt consolidation to be worth it, you should have a good amount of debt out there and reduce your payments and/or lower the term on your loan. For example, let’s say the total payments of all the debt you’re consolidating (including the mortgage) is $2,000 and you have 25 years left on your mortgage. If you have to put the loan on a 30-year term and only reduce your payments by $100 or so, it’s probably not worth it.
What debt consolidation means for most people is an increase in credit score. Your credit will continue to go down with a lot of creditors with outstanding balances (a lot of loans with a lot of different people). Not only that, but only the most organized people can pay every bill, every month, on time. If you miss even one payment while having that much debt out there, you’ll see your credit score dip quite a bit.
In my time in mortgage sales, I noticed that the people who do mortgage refinances see their credit score go up by 50-150 points within 6-12 months after taking out their loan. I had a 525 credit score take out a mortgage, pay off $22,000 in credit card debt, a boat loan and a car loan, lower their payments by $450 per month AND lower the term on their mortgage from 28 years remaining to a 20-year loan. They wanted an auto loan from us 14 months later and their credit was 705! The secret for them was to stay disciplined. They cut up their credit cards except for one “emergency use” credit card. They paid cash for everything.
And when they asked for an auto loan, they were able to refinance their mortgage 1.25% lower of an interest rate, take out the $20,000 they needed and still kept their payment the same! The power of the debt consolidation saved them thousands and thousands of dollars of interest!
Quickly, here are the benefits of a debt consolidation:
1. Lower payments
2. Shorter mortgage term
3. One bill vs. MANY bills
4. Improved credit score
Those are in no particular order, because I personally value each of those just the same. They are all so important. But perhaps the lowest payment possible is most important to you. You can refinance at a longer term and lower your payments as much as possible. That’s where the flexibility comes into play.
In order for a debt consolidation to be worth it, you have to have a lot of debt. I hope you never incur that much debt, but if you do, look seriously into a consolidation loan. It is well worth it!