Hot off the presses, EOD Nation, despite all you may have read, debt consolidation loans are not evil.
Even after completing a debt management plan in which we paid off $109,000 of credit card debt, my wife and I knew we still had actions we had to take to really get our finances completely on the right path. One of those actions is paying off two additional lines of credit that could not be included in our debt management plan.
Our goal was to consolidate these two lines of credit with a single consolidation loan. We applied for such a consolidation loan in December, before we completed our debt relief program, but were denied because we still had accounts being managed by credit counseling. We were advised to wait until a few months after our last program payment, and then try again.
Last week, we decided it was time to apply again.
Some would call a consolidation loan simply borrowing from Peter to pay Paul. I view it as a restructuring of debt to our advantage. Here’s the positive points of a consolidation loan:
- Lower Interest Rate: The two lines of credit that we are consolidating each have an interest rate in the mid-teens. The current rate of an unsecured consolidation loan is significantly lower.
- Finite Term: One of the major points against consolidation loans is that consumers trade a lower payment for a longer term resulting in carrying the debt longer. In our case we are consolidating two lines of credit that would take 30+ years if we only paid the minimum payment. The consolidation loan forces us to make a payment each month for a 5 year term. Even if we only make the required payment each month, we have a fixed date when loan will be paid off.
- No Temptation: The current debt is in the form of two lines of credit, which means we may be tempted to continue to use them for purchases. Using those lines of credit would increase the time it takes to pay them off. One of the negatives of a consolidation loan is that it doesn’t address a potential underlying spending problem, AND it frees up lines of credit to be maxed out again resulting in even more debt. With our consolidation loan we would CLOSE those two lines of credit, eliminating the temptation to increase the level of debt.
- Same Monthly Payment: We ran some initial numbers with a loan calculator and discovered that our monthly payment to a consolidation loan with a lower interest rate would be almost identical (within $10 a month) to what we’re paying now towards the two lines of credit.
- No Penalty for Early Payoff: We could just throw extra money at the lines of credit each month and pay them off ourselves. We could still do that as the consolidation loan has no penalty for early pay off, AND we would be throwing our money at a debt with a lower interest rate.
For these reasons, a consolidation loan will help us keep our finances moving in the right direction towards complete recovery. The goal for us is to get out of the world of revolving debt and variable interest rates. We want all our remaining debt funneled into finite terms and rates. After completing our debt management program, and refinancing our mortgage, these two lines of credit are the last remaining debts to convert.
We sat down with a banker about a week ago, and closed on our shiny new consolidation loan three days later. The lines of credit are closed, and the payments are in flight. We no longer wait for the yearly letter telling us whether or adjustable rate mortgage payment is increasing. We no longer dread getting a letter stating our credit card interest rate is being jacked up to 30%. We are now in full control of our budget.
Let me tell you, friends, control feels GREAT.