Every human being, couple, and family has a special combination of what works for them. Some people find it early on and rock it, be it a nice car or a paid-off home. Some people are clueless forever, and some just enjoy the journey. This is true for all health: food health, physical health, emotional health, and yes, financial health.
Consolidating our debt
JHubbs and I need a hard and fast goal to write down and meet. So, we made the decision to refinance our consumer debt with a hefty loan and a hefty monthly payment, and we have a debt-free date 18 months from now. Even though it will cost us about $500.
Image via Flickr – https://www.flickr.com/photos/hankinsphoto/
Here are a few reasons we chose to consolidate our debt instead of paying it off the good old fashioned way
The interest rate of the whole loan is comparable or better than the current rate on the majority of our debts
We now have one large payment per month
We now have one thing to aim at with our surplus funds
We have no choice but to pay it all off in 18 months and are able to set a goal to pay it off in 12
A few things to think about if you decide to consolidate your debt
Do not refinance and then ring up more debt on the now-open credit cards. JHubbs is especially good about not racking up more debt and so far I have been behaving well also. We left the cards open for true emergencies (read: someone is in the hospital), but that is for our emotional health, not our financial gain.
Do not refinance with a sketchy bank or online service. We chose a bank I have been a member of for 20 years and with which I had a proven payment record. Though to be honest, I have no experience with online consolidation services. It just seems like a bad idea for me.
Do not refinance if this isn’t your financial style. Try new things and try easier things before you make a big decision. Just because it works for us doesn’t mean it will work for you and just because snowballing payments works for someone else, don’t feel crappy if it doesn’t work for you. What matters is that you make informed, consistent decisions!
Do the math and make sure it is worth it. Before we heard back from the bank, we talked about what our “comfort interest number” was. As in, what is the most amount of money we would be comfortable paying a bank to help us get out of debt. If we received a decision that meant we were paying $1,000 in interest more than what we would have already paid, it would not have been worth it. But to us, $500, while no small sum, is worth losing the stress of multiple payments and the guarantee of an end date. However, if we had received a poor interest rate and it would cost $800-$1200, it may not have been worth it to us.
So far, I can say that this has had a dramatic impact on the emotional side of our finances. Since my “style” is workaholic, I tend to check our finances three or four times per week. That is a lot of signing in and out of accounts and tracking! As the “account closure” letters come flying in, each is one more account I don’t need to be worrying about in the back of my mind. I have more time to focus on knocking out the lump sum.
I also love the freedom of mini-snowballing on the debt. Besides the one monthly payment, I can now very easily transfer $20 here and $90 there, depending on what is remaining in an account after a given budget period. Before we consolidated, those discretionary amounts would end up in our checking account or going to (what felt like constantly) some small bill without making any overall progress.
How did our story end? Stay tuned for the update to see if it panned out a year later!
Have you ever consolidated your debt or “gone into more debt” to get out of debt? Did it work for you?
Months ago when I set down and made an action plan to get rid of my debt, I looked into consolidation because numerous people said it was cheaper for them. Research and planning later, I found out that consolidating my loans would cost me more. I’m doing the same thing as you though, online checking my balances & interests, paying here and there instead of once a month (it works great). It was a deeply satisfying feeling when I logged on two weeks ago to one account and saw that since I’ve paid so much extra, I technically don’t owe anything for months! Needless to say, I’m still pouring more money into it and the due date is getting pushed back further. I wonder if at a point they’ll have to readjust what I’d owe every month, since I’m on continuing with this?
I doubt they’ll readjust anything, so long as you are paying on time. Congratulations on being so hardcore about paying down your debt!
I’ve done every home loan I’ve had through the same bank (or starting off with the same bank and taking into account acquisitions, which are inevitable in the banking industry). The big name plus the positive experiences have made this an easy strategy for me.
Good call! There’s definitely a benefit to using one provider for most or all of your financial transactions!
Your first bullet of things to think about is the most important I think — “Do not refinance and then ring up more debt on the now-open credit cards.” In my experience, this is precisely what happens to the majority of people who go for a consolidation loan. After clearing their credit cards of debt, the spending party soon resumes and a few years down the road they’ve again got maxed out, high-interest credit card debt PLUS the consolidation loan. So you’re right–you’ve really got to commit to paying off debt, not making room for more debt, for a consolidation plan to work. This is why a Debt Management Plan often works better than consolidation. With a DMP, all of your credit card accounts are closed except one and you’re consulting with a certified credit counselor.
100% correct — the open card(s) create(s) a lot of “opportunity” for “emergencies,” and then you’re worse than when you started!
Once I finish schooling I will probably look and see if it’s possible to consolidate my student loans. They are all through a single vendor but are divided up into 6 different loans. It’ll be a lot easier to make payments if I can roll them all together.
Student loans are a whole different world — definitely look into your options to prevent having to manage and monitor a bunch of different loan accounts!
Once I finish schooling I will probably look and see if it’s possible to consolidate my student loans. They are all through a single vendor but are divided up into 6 different loans. It’ll be a lot easier to make payments if I can roll them all together.
For the same reasons you listed I love the idea consolidation. We have some unsecured debt consolidated into a DMP program and I love that one payment goes towards like six things. It didn’t make sense to consolidate our other debts though since the interest rate was already so low- 4-5.5%. The key is having the self control to not rack it back up!
Yep – The most important step is looking at those rates to make sure you’re getting a better deal in the end!
I would you have taken the right decision. I always prefer to pay debt before the actual date.
On-time payments are very important. Thank you for your comment, Kevin!