Living with overwhelming debt is hard. Living with overwhelming debt in retirement with limited income can be even harder. If you’ve ever explored different ways to handle debt, you may have come across information about debt consolidation.
Debt consolidation is a type of loan refinancing that consolidates all your debt into a single loan. Many times, it can be with a single lender who can give you one convenient payment each month which can help if disorganization has contributed to your debt getting out of hand.
Sometimes, you may even have the option of getting a better interest rate with a new lender. Debt consolidation isn’t for everyone, so it’s best to review your options to find out if it could work for you. We recommend speaking to a financial advisor who can assess your situation and make recommendations.
If you are wondering if you should consolidate your debt here are some things to think about.
How Did I Get into Debt in the First Place?
The first thing you should ask yourself is if you have some money habits that might prevent debt consolidation from being helpful. If you use debt consolidation as a band-aid for a bigger problem, it could end up getting you into more trouble in the long run.
If you are a chronic overspender or simply don’t have enough income to cover your debt payments each month, debt consolidation will not help you. A lower interest rate and a single payment might help you for some time, but if you continue to rack up more debt, you’ll end up deeper in the hole with your both consolidation loan and new debt.
It’s a good idea to take a moment and assess if you are really ready to make progress on your debt by consolidating it into one loan. If you feel as though you can curb additional spending, then debt consolidation might be a good move for you.
Could I benefit from Debt Consolidation?
Not everyone can benefit from debt consolidation. If you can get a better interest rate than what you are paying on current debt obligation, then debt consolidation could help you pay down your debt faster.
If you’ve got a lot of credit card debt that you are paying high interest on, then a debt consolidation loan could help you tame the compounding interest working against you. If you’ve got low interest loans, say from student loans, then it might not make much sense to consolidate your debt. You may not get a better interest rate on this debt, plus you would lose any protections offered to you under federal student loan repayment plans.
You should also know if you have sufficient income to meet your existing debt obligations. If you are not making enough money, debt consolidation will not help you because you still won’t be able to meet your monthly payment obligations.
Finally, you should know, that in most cases, you will need a good to excellent credit score in order to consolidate your debt. It can be difficult to obtain a debt consolidation loan if your credit history is not good.
Lenders will look at your credit score, income, and other factors to see if you are qualified for a debt consolidation loan. If you do not meet their expectations, you will not be able obtain a loan to consolidate your debt.
What are My Options for Debt Consolidation?
There are many different ways that you can consolidate your debt. You could take out a home equity line of credit (HELOC), refinance your home to get cash out of the equity, or even get a personal loan from a bank or similar financial institution.
You should know that any debt consolidation loan that involves your house could put your primary residence at risk. However, it can be an option for some people if they are confident that they will be able to pay down the refinance loan or line of credit tied to their home. A benefit of this approach is that you can often get lower interest rates because the loan is secured by an asset like a house.
A personal loan can be helpful if you are consolidating high interest credit card debt. Personal loans are beneficial because they can give you a fixed monthly payment amount and a fixed interest rate that is often much less than the interest on a credit card. However, because these loans are unsecured (not backed by an asset,) the interest rates can still tend to be on the higher side.
With any of these products, you’ll still have to have the income and credit to qualify. However, there is a loan product, insured by the FHA, that doesn’t require substantial income or perfect credit. You could also use it to consolidate your debt. It’s called a reverse mortgage.
If you are age 62 or older, you could qualify for a reverse mortgage. With a reverse mortgage, you still maintain ownership of your home but can receive monthly cash payments from the equity in your home. You just need to continue to pay your property taxes, homeowners insurance, and home maintenance costs to avoid foreclosure.
These cash payments can be used to increase your cash flow savings in retirement and accomplish financial goals.
Making the choice to consolidate debt is a serious one so you should research all the options that are available to you and choose the one that makes the most sense for your situation.
Aja McClanahan is a freelance writer and owner of www.principlesofincrease.com.