Household debt in America has reached an unprecedented peak. As of the end of the first quarter of 2017, total household debt topped out at $12.73 trillion. This is a staggering $50 billion higher than the previous high-water mark reached during the financial crisis of 2008, according to a recent report by the Center for Microeconomic Data. Now that the U.S. economy is off life support and starting to percolate, lenders are finally easing their lending standards, giving more Americans access to more credit than they have seen in the last nine years.
While Americans are enjoying to the ability to buy more houses, cars, and consumer goods, household debt is on an upward trajectory and is showing no signs of slowing down.
Why People Fall into Debt
There are many reasons why Americans continue to borrow money and put themselves into debt. Buying houses and cars and all the “things” that Americans covet is what many consumers feel is part of attaining the American Dream. In addition, with lenders loosening up their purse strings, the ability to buy is getting easier and easier.
However, many of the reasons consumers fall into debt are related to a lack of knowledge about managing money. Most Americans never learn about budgeting and saving while in school. Understanding how to stretch a dollar to make ends meet is a skill many consumers just don’t have. Combine that with a lack of discipline to live within one’s means, or the inability to save for emergencies or a large purchase, and you have a recipe for rising debt.
Many consumers rely on credit cards to make up for their budget shortfalls or to fund an emergency. Most Americans have little or no money in their savings account. When out-of-the-ordinary expenses occur, such as a car repair or a broken furnace, most consumers cannot pay cash for those emergencies. Instead, they utilize credit cards and other high-interest credit sources to pay for them.
Other times, debt will accumulate because of other unexpected events such as the loss of a job or an injury or illness. If a person is out of work for any length of time, debt can accumulate very quickly. In many cases, he or she will have no choice other than to turn to credit cards to survive.
Unfortunately, many consumers will find themselves in a mountain of debt without even realizing it. Only when they cannot continue to meet their obligations do they realize the depth of their troubles. If they act swiftly, they can mitigate the situation with a debt consolidation loan.
Defining a Debt Consolidation Loan
Debt consolidation loans take all of your credit card and other debt and combine them into one loan with one payment. A borrower looks to obtain better loan terms, such as a lower interest rate, so the new payment is less than what he or she is currently paying out to creditors. The added benefit is only making one payment per month. Many consumers feel this will give them an easier way out of their credit card debt problem.
When it comes to debt consolidation loans, there are several things to consider. Finding the right solution often depends on individual circumstances, such as the amount of debt and the consumer’s credit score.
If a consumer owns a home, he or she could consider a home equity line of credit (HELOC). These loans utilize the equity in a consumer’s home and are usable for any purpose, so it is a popular option among those looking to consolidate debt. Home equity lines of credit are usually easy to attain if a borrower has a good amount of equity in the home, a solid income source, and a decent credit score.
Another loan consolidation option for consumers who have a good amount of equity in their home is a home refinance with cash out. With this loan, the borrower takes out a completely new home loan that is larger than the old mortgage amount. The borrower receives this extra money and can use it to pay off credit card and other debt. This, as well, requires that the borrower have a good amount of equity in the home, a steady source of income, and a good credit score.
A third option that many consumers utilize when consolidating their credit card debt is a personal loan through a bank or other lender. Personal loans are of great use when the debt problem is small. Personal loan interest rates are generally less than credit card rates are, and the loan terms are usually short. The monthly payment is likely going to be about the same due to the shorter loan term, but you can free from your debt far quicker than if you just continued to make monthly minimum payments on your cards.
The Advantages of a Debt Consolidation Loan
A debt consolidation allows you to make just one payment per month to one creditor, rather than having to keep track of a pile of different monthly minimums, all due at different times. You also likely face a lower payment and interest rate, each of which can give you a bit of breathing room with your finances.
Reduced Number of Payments
When you utilize a debt consolidation loan to address your debt problem, one of the clear benefits is that you will now only be making one payment to one creditor instead of many to multiple creditors. Making one payment per month lessens the chance that you will miss a payment due date. Your credit score will thank you!
In addition, streamlining your finances can reduce your stress levels if money has been causing you anxiety or interfering with your relationships. Dealing with only one creditor frees up time and emotional resources that you can then devote to family and enjoying life.
Lower Payments
Most consumers seek a loan consolidation to lower the amount of money they pay out to their creditors each month. If done successfully, debt consolidation can allow a family to begin to save money and build a financial safety net that can help them avoid falling back into debt. In addition, it can offer some breathing room so consumers are not stuck in the unfortunate cycle of living paycheck to paycheck.
Lower Interest
With most loan consolidations, consumers will receive a lower interest rate that will help them pay off their credit card debts faster. Additionally, a lower interest rate will keep payments lower and help alleviate the monthly burden of debt payments.
Consumers should make sure that debt consolidation makes sense for them by understanding what they are currently paying in interest on their debt, and what they will be paying on the proposed loan. Longer terms should not be the only reason for lower payments.
Getting Caught Up
A debt consolidation loan can help consumers get their bills caught up if they are consistently running behind each month. Barely paying your bills and living paycheck to paycheck greatly reduces the joy in life, and it can cause chronic stress. Running behind on monthly bills can also have a detrimental effect on a consumer’s credit score. A debt consolidation loan might free up enough extra cash each month to get ahead and start saving money. By having money in the bank, consumers are no longer vulnerable to life’s financial emergencies, nor are they at risk of running up credit card debt again.
Disadvantages of a Debt Consolidation Loan
As with anything, there are downsides to a debt consolidation loan. Freeing up credit once again can be too much temptation for some people if they don’t change their spending habits. In addition, depending on the type of loan you choose, you could actually end up paying more in interest over the life of the loan.
Accumulating Credit Card Debt Again
A debt consolidation loan can take away the pain of being in substantial debt in a heartbeat. However, consumers who have not had to tighten their belt and be disciplined enough to pay off their debt the hard way are often at risk of running up their debt again. Those consumers who have paid off their debt through hard work and determination know the difficulties and are unlikely to run up their debt again.
Those that take a debt consolidation loan and then run their credit card debt up again find themselves worse off than when they started. If they utilized their home equity to consolidate their debt, they now have a bigger mortgage and a burdensome amount of other debt. If their credit card debts accumulate to the point that they cannot continue to meet obligations, they could be putting their home at risk.
Paying More in Interest
While debt consolidation loans can lower monthly payments and may bear a lower interest rate, sometimes, consumers will actually pay more interest over the life of the loan. If consumers choose a home equity line of credit or a home refinance, those loan terms are likely to be very long. Most mortgages carry a 30-year term, and home equity loans can be very long as well. This means that even with a lower interest rate, many consumers will actually pay more interest than they would if they just paid off their credit cards.
Unchanged Spending Habits
Sometimes, consumers don’t learn their lesson when it comes to accumulating debt. They find that after debt consolidation, very little changes. Any money they are saving monthly quickly disappears due to their habit of overspending and not budgeting. If consumers don’t change their spending habits after debt consolidation, it is very possible that they could find themselves buried in debt again in very short order.
Those Unable to Qualify
A debt consolidation loan can be a good option for many, but those with insufficient credit scores or income that is not steady or easily verified may find difficulty gaining approval for a loan. If this is the case, they may feel helpless to ever solve their debt situation and feel that bankruptcy is the only way out of their circumstances.
Bankruptcy is a very serious financial decision. Your credit rating will suffer for quite some time. In fact, a bankruptcy will stay on your credit report for 10 years. You will find it impossible to get a mortgage if you don’t already have one, and you may lose assets that the bankruptcy court deems ineligible for exemption. You will no longer have the use of any credit cards either.
Bankruptcy does not relieve you of all of your financial burdens. Consumers who are obligated to pay alimony or child support must continue to make those payments. Bankruptcy will also not wipe out your student loan debt. If you have a mortgage, that debt will remain as well.
A better alternative may be to work with a debt relief company to help you resolve your debt situation. National Debt Relief works with consumers to negotiate settlements with their creditors. By taking over the communication process and working with credit card companies to reach a reduced settlement amount, National Debt Relief helps consumers finally become debt free. While debt settlement isn’t fast, and you will have some impact to your credit rating, it is an effective method of settling debt for consumers in too deep.
Overcoming a big debt problem can be stressful and overwhelming for any consumer. It’s important to take action before your choices become few. Take control of your debt problem today and get on the road to financial freedom.