[MUSIC] Hi there, Michael Bovee with
Consumer Recovery Network. Thanks for tuning in to our
YouTube Channel, DebtBytes. Today, I’m going to continue
on with our pros and cons series and
the topic is Debt Consolidation. Typically debt consolidation for
most of us, it’s understood to be a loan. Often times, people might
consider using a balance transfer, as a form of debt
consolidation as well. What types of loans? Well, loans you might get from
your bank, a personal loan, or a peer to peer loan, or even
a home equity line of credit. Those are coming back. After the recession, we didn’t
see as many of those, but they’re more common. So when you’re
taking out a loan, you’re typically going to be
paying off multiple accounts. So let’s get into the pros and cons of that type of
debt consolidation. Okay, first off, the main
purpose of consolidating your debt is to lower
your interest rates. So let’s assume, for a moment,
you have five credit cards and the average interest
rate is 17% and you can get a home
equity loan and pay 6%. The benefit there is obvious. In the case of,
say a balance transfer, some of those interest rates
could be fantastic, right? You can get intro rates that
are 0% or relatively low, lower than 5%. And if the balance that you
have available to use and transfer other debts onto
that is large enough, you might be able to whack out all
of your other unsecured debt, say those five
credit cards again. So that’s a pretty
real benefit as well. Okay, so moving on to another
pro is simplification, right? And it’s because you only
have one payment now. If you’re consolidating five
credit cards into one loan, just paying them all off and now
you just have the one loan and only one payment to make. It’s less to keep track of, it’s
less things to worry about, ACH payments from your bank account
or keeping track of things. In other words,
the simplicity is a benefit. Okay, now another pro and it
will depend on who you are and how stretched your finances are,
but the preservation of your credit,
of your credit score, or having nothing happen to any of the
trade lines on your credit is a huge benefit to consolidation
and let me explain. When you do alternatives to
debt consolidation to manage, if you’re in a tight spot and you absolutely are doing this
to get the lower interest rates, otherwise how are you
gonna afford your bills. Well, the alternatives like
bankruptcy that hurt your credit, debt settlement
obviously hurts your credit, even debt consolidation through,
it’s a different type of debt consolidation, through
a credit counseling agency and non-profit, they actually
close your accounts. In that regard, it doesn’t
really hurt your score or credit counseling, per se, but it’s on your report that
you’re on a managed plan, and it can prevent other options,
other financing options, at least for a little while when
you’re on one of those plans. So, debt consolidation loan is probably the best way to
manage that debt situation and get a better interest rate and
have it preserve your credit. All right, so another benefit
is a fixed pay off, right? So, assume for a moment that
you’re doing this correctly and you are taking those five
credit cards for example and you are combining them
into one payment. And now, that fixed loan is
not something that revolves, where you can use the credit
card a month to pay some and then use it some more the next
month and then pay it off and the balance fluctuates and
the minimum payment fluctuates. In a traditional consolidation
loan, it’s gonna be a fixed payment and that gives you
a fixed time to pay it off. So there’s a great deal
of benefit in that, in predictability and so forth. So that’s also a pro. Okay, balance transfers,
I mentioned briefly and I wanna mention them
even more now as a pro. In that there’s a lot more
flexibility in balance transfers because banks do compete for
your business. Once you’ve done a couple of
these consolidation types of events through balance
transfers though, it starts to look like you’re
playing musical chairs. So, I’ll get to more
of that in the con. Very specific to
balance transfers. But at least in this
context where you have more options, banks competing for
your business, those balance transfers could be seen as
a pro, depending on who you are. Okay, so on the con side,
one of the biggest problems, and it depends on who you are, but
for me, from my perspective of communicating with consumers for
almost 20 years on problem debt. I just see this so
much that it’s, for me, the first thing I
wanna point out and don’t be this person
if you can avoid it. You might already be when
you are watching this video. You do the balance transfers or
the consolidation loan and you don’t close those other
accounts and I get it, but you start using
those other cards. They were paid down to zero and
suddenly now you’ve got those racked up, those charges, and
the minimum payments that are now again,
stretching your budget thin. And you don’t have that
flexibility anymore in your budget, because you have one
consolidation loan that you’re paying the minimum payment on
every month and now you’ve got the credit card bills on top
of it, so it’s compounded. Your earlier efforts to
consolidate your bills, needing to do it again and
not have a lot of options, okay? So be very careful on that con. I see it a lot more with balance
transfers of old and jumping from one card to the next, so
let me get to that right now. Balance transfers are usually
at an intro rate, okay? So it’s not like you get
this consolidation balance transfer loan type of product,
and it stays at that low, low teaser interest rate, for
the lifetime of the balance. Usually it’s like a year. Okay, so, you transfer all
your balances over there, and everything’s affordable
because it was an intro rate. It was 0%, it was 4%, 2.9%,
and then in the 13th month, it goes up to 11% or 9.8% or
something like that. And suddenly now that’s
not within your budget. I’ve seen it happened even worse higher interest
rates that they revert to. So, or you missed
a payment accidentally and now the intro rate is gone,
right? So these balance
transfer changes or these intro rates
are only temporary. The person who has a consistent
income, very fixed and is able to do and
afford their bills, doing a balance transfer and
then at their Christmas bonus that they know they
get every year or they get their tax refund and
they pay that stuff down. Fine, okay, but if your income
is not consistent, if your spending is not consistent,
if you have unexpected expenses come up and you start using
those cards again, those balance transfers are usually
a stop gap type of measure at a critical point where you
change your behavior as well. So these debt consolidation
things are a great tool along with some tighter
budgeting, often enough, and/or some behavior changes and
some spending changes, okay? Be careful of the balance
transfer boogie. In fact,
I have a post up about it. Okay, another con for
consolidation loans and balance transfers and what
not is you have to apply for these things,
these other accounts. And you have to get approved. So if you’re already
stretched to a place where your interest rates
aren’t affordable, it could very well mean that
your debt to income ratio, your credit utilization on some
of your accounts that you’re trying to consolidate, are so
high that you won’t qualify. So that’s an impediment to being
able to consolidate in the first place, so be careful. Okay, so, pretty simple list for
consolidation loans and balance transfers. Thanks for
tuning into our YouTube channel. I’ll see you on the next video. [MUSIC]