When my wife and I were in debt, we were researching every way possible to get out of it and to do so quickly. The stress from carrying all the debt was so overwhelming that we were motivated to take whatever actions were necessary to eliminate our debt in a short period of time.
A decent portion of our debt was credit card debt that we were paying a high interest rate on. We realized that if we were able to consolidate that debt at a lower interest rate we would save a good amount of money in the long run. This led us on a quest to see whether or not debt consolidation was worth it. Here’s what we found.
What is debt consolidation?
Debt consolidation is when you combine multiple debts into one debt, primarily so that you can lower the interest rate for all the debts that you previously held.
For us, some of our credit card balances had interest rates that were over 20%. The high interest rates we were paying made debt consolidation seem like an attractive option to consider, because lowering our interest rate would mean we could pay the debt off faster.
Debt consolidation options
There are a couple of different options we explored when we were deciding whether debt consolidation was right for us.
Using a debt consolidation company
Using a debt consolidation company can be a great avenue, but there are a lot of companies out there that take advantage of people looking to consolidate their debt. They do this by charging origination fees for consolidating the debt, and some of them even roll in 0% interest debt that you end up paying interest on when it’s consolidated.
Also, some debt consolidation companies are not debt consolidation companies at all. There are two other types of debt relief companies that you need to be aware of.
- Debt management companies. Debt management companies work with the lenders you owe to try and negotiate interest rates and payments. They often charge fees for this and the negotiations can have a negative impact on your credit score.
- Debt settlement companies. These types of companies works with the lenders you owe to try and negotiate on the principal balances you owe on your debt. They often charge fees, as well, and their negotiations will most likely have a negative effect on your credit score.
These types of companies are different from straight debt consolidation companies, and it’s important that you research them thoroughly — both with the Better Business Bureau and via online reviews — before you sign any contracts.
If you are certain you’re dealing with a straight debt consolidation company, it’s still important that you do your research well before making a decision. Check out reviews on the debt consolidation companies you are considering and don’t make any hasty decisions about going this route. Read the fine print on any contracts before consenting to use a debt consolidation company.
It’s also important when considering debt consolidation that you are certain you’re working with a reputable, well-known company. The following signs should be red flags that the consolidation company you’re considering may be operating unethically:
- You’re asked for money up front before the loan is approved
- The company does not have a street address or office location
- The company uses scare tactics in working to get you to sign a contract
- The company guarantees loan approval before having had time to review your application
Borrowing from a family member or a friend
The first thing I want to point out is that borrowing money from a loved one can be very dangerous. This is because when you borrow money from someone it can change the dynamic of the relationship.
If for some reason you are unable to pay them back, then it could put a serious strain on the relationship and you may even risk the possibility of losing that person as a friend or putting a permanent wedge in a relationship with a close family member.
Money expert Clark Howard has long had two rules about lending money to family friends. One: Treat it as a one-time only thing. And two: Treat any money you lend as a gift, rather than as a loan. That way, if you do actually get paid back it’s a happy surprise.
However, with that caveat, this is the route that we chose when we were paying off $52,000 in debt in 18 months. I had a relative who was willing to help us consolidate our credit card debt into one lump sum, so that we only had one payment to make each month.
The reason why I think this was effective for us was because we knew we had the resources to pay it off quickly and were planning on paying the debt off sooner than the terms of our arrangement. So, in the end, borrowing money from this person actually strengthened our relationship with this family member, because we proved that we were trustworthy by paying our loan in full ahead of schedule.
The one debt consolidation mistake you can’t afford to make
One mistake that many people make when using debt consolidation is that they’re not committed to no longer using credit to pay for things. If you’re not ready to stop using credit, then a consolidation loan will likely lead to more debt as you find yourself with zero credit card balances again.
So, if you’re considering a consolidation loan, make sure you are done using credit cards as a way to fund expenses and that you’re committed to cutting up your credit cards and living within your means.
In the end, I found that consolidating our debt was definitely worth it. It gave us a sense of relief knowing that we were paying a lower interest rate and that we were speeding up our path to becoming debt-free.
While debt consolidation is not always the best option, it can be a great avenue for those who are paying higher interest rates and would like to reduce the amount of payments they make each month. That is why we found it very effective when we paid off all $52,000 in debt in 18 months — it reduced the amount of interest that we were paying so that we could throw more money at our debt and eliminate it faster.