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Does It Pay to Consolidate?


It depends. Bill consolidation can be a great financial decision. But it can also be detrimental and even set some people up for failure. So how do you know which camp you're in? Let's look at things you should be considering.

1. What is your goal?

Is it to save money each month in payments? It is to structure your debt so it pays off sooner or in a set amount of time? Is it to save money on your interest rate? Take a serious look on what you're trying to accomplish because it is key to determining if consolidating a good fit for you.

If you said you wanted to reduce your monthly payments, will the restructure accomplish your goal? What will you do with the extra money? Will you save it or use it to reduce other bills and if so, do you believe you have the financial discipline to do this?

If your goal is to get your debt paid off sooner, are you comfortable with the new monthly payment structure? 

If you want to reduce your interest rate, have you compared the estimated total cost of the new consolidation loan with the terms of the current debts? If you are lengthening the repayment term with the consolidation loan, even though you're reducing the interest rate the total cost of the finance charge could actually be more so you need to take a look at this.

2. Will you be re-using any of the accounts you plan to pay off in the consolidation loan? How does that fit in with your goal? 

Sometimes we encourage people to keep certain accounts open for various reasons. Maybe because we think it will help to enhance your credit score or we believe it is good practice to maintain another credit card. But you need to consider how you will use these accounts. One of the worst things you can do is escalate your debt.

3. How much new debt do you anticipate taking on during the term of this consolidation loan?

Sometimes people will want to do a bill consolidation to get them closer to realizing a goal like a car or home purchase. If something like this is in sight, consider affordability overall with everything included. Does it work for you?

4. Are you planning to put your house or car up for collateral?

If you're looking for a rock-bottom rate, this can be a great strategy. Depending on how much debt you have, you can save hundreds, even thousands of $$$. But there is risk with this transaction you must consider.

First, do you have plans to sell your car or your house during the term of this consolidation loan? If the answer is "yes" or "maybe", will you have enough value in your collateral to payoff this loan and take the next steps like buying a replacement car or having a down payment for new house? We make loans on retail value of your collateral today. But this doesn't take depreciation or costs to sell into account. You'll need to do that. If you're taking out a 5-year loan using your car as collateral and you think you're going to trade your car in 2 years from now, at that time will the car have enough trade-in value to pay off the remaining balance of the loan and get you into that next car?

Next, what if something goes wrong? You're putting up a valuable piece of collateral. We'd like to think that bad things never happen to good people, but we all know that sometimes it does. If you lost your job or had a family trauma and it impacted your ability to make your payment for a few months, how would you do? Do you have emergency savings or other assets you could liquidate to get you thru hard times? If you don't, putting up your house might not be the best move. Think long and hard about this decision.

Bill consolidation is a great tool if you go in with your eyes wide open. We do consolidation loans of all types and sizes every week and we do them well. Rest assured we have YOUR best interest in mind, but you need to do your own due diligence because only you can answer these questions.