We’re Getting a Debt Consolidation Loan, and I’m OK With That

consolidation

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

 

About Travis

38 Responses to “We’re Getting a Debt Consolidation Loan, and I’m OK With That”

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  1. I’m sure it was tough making the decision to get the debt consolidation loan, but truly, there are so many benefits! When you’re drowning in debt, it can really save you a lot of money!

    • Travis says:

      It actually wasn’t that hard of a decision, Retired by 40….lower interest rate, one payment instead of two, same payment amount….it was pretty much a no brainer. The only caveat was going against what most PF “experts” say! Thanks for reading!

  2. Sounds like a great idea. Another step in the right direction. Are you planning to throw any extra money at it? We are looking to do something similar with our 1st mortgage and line of credit after our consumer debt is pay off.

    • Travis says:

      Good question, Brian – right now we’re just trying to check everything off our list of “todos.” Then we’ll go back and evaluate which loans (mortgage, car, consolidation loan) we want to throw extra money at. Thanks for the brain tickler to think about it!

  3. Smart move, my friend, and I completely agree with all of your reasons here. As long as a person is truly committed to going debt free and not at risk of simply charging up all of the cards again, a consolidation loan, IMHO, is a wise financial move.

    • Travis says:

      The biggest thing for me was the absolute finite end to it all. I can point at a calendar and know that as of THAT date it will be gone – I need a goal to strive for!

  4. Definitely sounds like you made the right decision for your situation Travis. I know they can get a bad rap, but there are many times when they work out just great and should be used. The great thing is that it’s going to give you peace of mind, not to mention the financial savings. Are you planning on throwing extra at it each month, are will it be a month to month kind of deal?

    • Travis says:

      Like I responded to Brian in a previous comment, we’re currently working through out TODO checklist, then we’ll figure out where to apply any extra funds. the thing to remember is that a consolidation loan is simply a tool in the tool belt. You can use it to build something, or you can hit your self in the head with it…..Thanks for stopping by!

  5. It sounds like the decision is a good one! Hopefully the restructuring will get you out of debt once and for all!!! =)

  6. The big potential problem with debt consolidation is not a problem for you. You financial behaviour HAS changed, so you won’t auto-pilot your way towards maxing out the empty spaces. 5 years sounds a lot better than 30! And interest rates in the teens? Ouch! Glad you’re rid of those.

    • Travis says:

      I’m glad to be rid of that interest rate too…although the interest rate on our consolidation loan isn’t spectacular either. More incentive to get it DONE! Thanks for your comment!

  7. Maria Nedeva says:

    Travis, consolidating is not always a bad idea (this is what the purists among us would have us believe). This is exactly what we did to pay $157,000 worth of debt: most of it was on credit cards and following conventional wisdom we shouldn’t have taken out a consolidation loan (we and broke the rule of ‘don’t make unsecured debt secured’). I doubt we could have paid the debt off if we didn’t: too high insterest and too high monthly payments. As it is we managed to keep our house, paid off the debt and our credit rating has, if anything, imporved. There is one condition: consolidating needs military discipline and exceptional focus for it to work out.

    • Travis says:

      Getting out of debt certainly requires discipline and focus…as does achieving any goal. There are many tools to use to get out of debt – and sometimes you just have to use every tool available!

  8. I have to agree with you here. Consolidation loans are great…as long as they’re used in the right way, by the right people. I think the big beef many have with consolidation is the debt management program consolidation..not a loan. With this type of consolidation, a company takes over your loan payments and you pay that company instead of all the different bills. They’ve prenegotiated low rates with lenders, so it usually looks like a pretty good deal. But, when you look at the fees in the long run for these programs, they often times cost more than just paying off the debt would have.

    • Travis says:

      That’s also not true, Josh. 🙂 The $109,000 of credit card debt we did pay off was through a debt management program (as mentioned in the post). We paid a $50 setup fee, and $50 a month for 55 months. Which means we paid a total of $2800 in fees to our debt relief company. In exchange for that $2800, we prevented ourselves from having to declare bankruptcy (our minimum payments were about to skyrocket due to a policy change with a major creditor with which we had 5 accounts), and through those lower interest rates we saved ourselves close to $40,000 in interest which allowed us to actually pay off the debt instead of drown in interest payments each month.

      There’s a lot of misinformation about debt relief programs flying around, and they get an unwarranted bad reputation. There are scams out there, but if you can find a reputable company they can help. The best advice I could give to someone out there struggling with debt is to get educated. Learn about ALL your debt relief options (debt consolidation loans, debt management programs, debt settlement programs, bankruptcy, DIY methods) and make the best choice for your specific situation.

  9. debt debs says:

    Congratulations, Travis…. another step towards debt freedom. Any time you can reduce interest charges it will help you get there faster. Basically we put our line of credit debt into our mortgage (one last time and this time was for real – our behaviour has completely changed finally!) which is at a lower rate but we are able to pay it off faster due to options for prepayments, payment increases and doubling up payments with no penalty. Fortunately we had equity room in our home to be able to do this. Looking forward to sharing the countdown journey with you.

    • Travis says:

      Yeah, the thought of keeping the lines of credit, and paying them off while paying a higher interest rate just doesn’t make any sense. Slow and steady wins the race. This allows us to have a consistent payment plan and budget each and every month. Getting out of debt is a marathon, and this is just one more leg of that journey!

  10. I think this is a great decision! Not many people sit down and crunch the numbers when they make this kind of decision. It sounds like you guys have, and it’ll definitely benefit you!

    • Travis says:

      Thanks Lisa – I agree, some people will just listen to the “experts” and do what they say. We’re all about “every day” or “real world” finances here at Enemy Of Debt. Grab your best financial tool and get to work!

  11. I think it’s great. You’ve educated yourself on this choice and it sounds like it’s the best option for you. Regardless of what other experts say in the end we all have to do what is best for our individual situations.

    • Travis says:

      Knowledge is power, Practical Cents…..and with that knowledge I can make the best decision for me instead of just blindly following someone else’s advice. thanks for stopping by!

  12. Tre says:

    Sounds like debt consolidation was a good idea in this case. The problem with debt consolidation loans is that people tend to run the other credit source back up while they are still paying off their consolidation loan, but you have eliminated that risk.

    • Exactly, Tre……with the other accounts closed, there’s no way to use them to accumulate more debt. That’s the trap people fall into..they ADD credit (the new loan) instead of replacing it. Close those accounts! thanks for stopping by!

  13. Sassy Mamaw says:

    Sounds good, Travis! To me, it’s a lot like dieting. You have to learn new habits and do what works for you. It looks like you have found your groove. Your family story is an inspiration to those of us still on this journey. Congratulations!

    • Permanent lifestyle changes, Sassy Mamaw…..that’s right! We’ve already made them, so continuing to find ways to pay off our remaining debt with as little interest as possible poses no risk for us to ring up more debt. We’re continuing down that path to debt freedom!

  14. Sounds like a win all around Travis. With the steps you’re taking to assure that taking out a consolidation loan will help you pay off, not move around, debt, your plan should advance your aims of getting out of debt.

    (I still can’t believe you guys paid off $109,000 in credit card debt… so awesome!!)

  15. I think that you have done your research and it is going to be a very positive outcome for you. I have looked at a few in order to consolidate some of my revolving credit that I have. So far, I have not had any luck where I would be paying relatively the same amount. I would love to have just one payment vs. multiple throughout the month. I hope that it is successful.

  16. Based on all the positives you listed, it seems like a great deal. I’m all about getting lower interest rates on debt!

  17. That feeling of control really can make such a difference. Not to mention getting a better rate!

  18. MomCents says:

    Sounds like a well thought out plan.
    The only potential negative (and it may not be a big deal to you) is closing a card you’ve probably had for a while. It’s my understanding that credit history of old accounts reflect positively (of course that is assuming they are paid on time and have a low debt/income ratio).

    So by closing the cards you lose that history – BUT it sounds like it was worth it in your case not to have the temptation to spend.

    Mathematically it makes sense!

    • Good point, MomCents, and I’m glad you brought that up. I’m really not worried about my credit score. It’s good now, and it may dip a bit when I close the accounts BUT, I know it will recover. Plus, since we just refinanced our mortgage and replaced our primary family vehicle, I don’t see any reason why we’ll be looking to apply for more credit any time soon. Thanks for sharing your thoughts!!!

  19. Delores Lyon says:

    Thanks for sharing your experience with debt consolidation! I never thought about how the consolidation loan would allow me to open up my lines of credit on a credit card that was maxed out. It’s good having something like a credit card open so that you can use it in case there is an emergency.

    • Travis says:

      My advice is to actually CLOSE the lines of credit to avoid the temptation to rack up more debt, Delores. I realize sometimes that’s the best you can do….but I encourage you to save up cash in an emergency fund and close those credit cards!

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