Consumer debt in America has risen dramatically in the last couple of decades, and it shows no signs of slowing down. According to the New York Federal Reserve, household debt at the end of 2016 was a staggering $12.58 trillion. This was an increase of $460 billion for the year with a whopping $266 billion added in just the last quarter. The amount of debt added in 2016 represents the largest increase in nearly a decade. These levels have not occurred since the financial meltdown in 2008 when debt was at a record level of $12.68 trillion.
Years of a sluggish economy and a very low GDP have taken its toll on the pocketbooks of Americans. The cost of living has outpaced income growth by nearly 10%, making it increasingly difficult for average citizens to make ends meet. Moreover, banks have begun to loosen the purse strings by making credit easier to obtain, which is making it easier for consumers to fall into more debt.
Another sign of this credit easing is the rise in mortgage originations. The year 2016 proved to be the highest year for new mortgages since the Great Recession, according to an article from CNN Money. Although mortgages make up a large part of household debt, credit cards, student loans, and auto loans are also very much responsible for the dramatic rise in consumer debt over the last few years.
Of the three, credit cards represented the largest increase. Credit card debt rose to a whopping $779 billion by the end of 2016. While the rate of delinquency and foreclosure is down among consumers, the debt load of Americans is heavy.
Reasons for high consumer debt and the need for debt consolidation loans
Many people have gotten themselves into debt because they have insufficient income to meet their everyday expenses. In addition, many Americans have very little savings and are unprepared for unexpected, large emergency expenditures. Since the cost of living has outpaced the growth of income for the past few years, being cash short every month has become the norm for many consumers.
Additionally, many Americans do not know how to budget their money to make ends meet. Therefore, overspending and living above their means is a common occurrence. Once this cycle begins, credit card debt rises each month, pushing consumers closer and closer to insolvency. When they reach a breaking point, having run out of credit, the situation becomes critical.
Unfortunately, many people wait until they get to this critical state before acting. This makes their options limited and a positive outcome less likely. If those in debt take definitive action early enough, there are ways to mitigate debt and facilitate paying it off. One of these ways is with a debt consolidation loan.
Advantages of debt consolidation loans
Many consumers are attracted to debt consolidation loans for a number of reasons. Being able to consolidate all of your payments into one payment per month makes things easier to manage. In addition, if you are running behind on any payments, a debt consolidation loan will pay off those balances and potentially improve your credit score. Chances are, the interest rate will be lower for a debt consolidation loan, and your one payment will be less than the combined total of all your other payments. This can certainly help ease the monthly burden for consumers.
Disadvantages of debt consolidation loans
While debt consolidations have many attractive features, some downsides exist that every consumer considering a loan should note. First, a consumer must ask how he or she got into debt in the first place. If basic monthly expenses exceed monthly income, that consumer should try to address this shortfall immediately. While debt consolidation loans can lower overall monthly cash outlay, the savings can quickly be swallowed up just in everyday living. Soon, you could find yourself relying on credit cards to get by once again.
If your debt problem is due to overspending and lack of discipline, this is not likely to change just because you have consolidated your debts. Exercising self-control over impulse buys and living within your means are important factors in getting yourself out from under the burden of credit card debt. Until you make the lifestyle changes necessary, consolidating your debt might only set you up for more trouble. Piling more credit card debt on top of an existing debt consolidation loan and an already tight budget is a recipe for disaster.
If you have made the important changes to your lifestyle, and you feel ready to look into debt consolidation, you can begin investigating your loan options. There are many companies and products to consider, so take the time to do your due diligence. Your objective is to pay off the debt as fast as possible while paying the least amount of interest.
Types of debt consolidation loans
There are many types of debt consolidation loans to consider. Some are secured loans, meaning there is some type of collateral put up to back or guarantee the loan. If you default, you may lose the property placed as collateral against the loan. Unsecured loans do not have anything placed as collateral. This means that the only thing you have at risk is your credit rating. It’s important to understand the difference between secured and unsecured loans when considering which consolidation loan might be the right fit for your situation.
A refinance of your current mortgage
One way to address your debt is to refinance your home mortgage and take some cash out to pay off your credit card balances. Sometimes, depending on overall mortgage market conditions, you may be able to refinance into a lower interest rate. This all sounds good, but consider some important things before rolling your credit card debt into your home mortgage. First, there will be closing costs associated with the loan that you will need to pay upfront or add to the balance of the loan. The money you take out also piles onto the mortgage debt.
At that point, if you take, for example, a 30-year mortgage, you will be paying interest and principal on your original loan balance, any closing costs you add on, and any money you cash out to pay off your credit card balances, for 30 years. The amount of interest on those additions can really add up.
In addition, when you utilize a home refinance to consolidate your credit card debt, you are moving that debt from an unsecured position to a position secured by your home. This can mean disaster if you are unable to make the new payments. Losing your home to foreclosure is a catastrophic financial event. You certainly don’t want to create a situation where your credit card debt places your largest asset in jeopardy.
Remember, if you have not changed your spending habits and closed all of your credit accounts, you may soon find yourself accumulating credit card debt once again. If this continues, you might find yourself in a position of carrying a large burden of credit card debt as well as a larger mortgage payment after you have gone through the debt consolidation process.
A home equity line of credit
If you own your home, it is possible that you owe less on your home than it is worth. This could be true if you have owned your home for a long time or bought your home during the depressed housing market of recent years. If this is the case, you are considered to be “above water” in your home. Simply put, you have equity. If you have equity in your home, you may be able to take out a Home Equity Line of Credit, or HELOC. A home equity line of credit allows you to draw on the equity in your home on an as needed basis. There are no limitations or restrictions on how you use the money, so it is OK to pay off credit cards with the proceeds.
However, again, remember that attaching your credit card debt to your home can be a risky proposition. As previously mentioned, doing so takes that debt from unsecured to secured by your home. Additionally, you could be paying that debt over an extended period, as home equity line loan terms can be very lengthy.
You will have to be very determined in your efforts to control your spending habits, and be prepared to live within your means to avoid racking up your credit card debt again. If you are not careful, you could also end up with a much bigger mortgage than you had previously, alongside your new credit card debt.
Those who have good credit scores and are up to date on all of their payments may be eligible for a personal loan through a lending institution such as a local bank or finance company. It could be a viable option if you do not have a large amount of credit card debt. Usually, these loans have a lending cap that limits the amount a bank is able lend you. Therefore, it’s possible that the amount you owe on your credit cards is more than the bank is willing to lend for credit card debt consolidation. However, if your total credit card debt fits within the banks limits, then you might be able to get an attractive interest rate and favorable loan terms.
These loans are mostly designed to simplify the repayment process, meaning consolidate your debt to just one payment and help pay your debt off quickly. This means that the loan terms will be much shorter than with a home equity loan or a refinance. The consequence is that the payments will probably be about equal to what you are already paying on your existing accounts. However, the benefit of a short-term personal loan is that you will pay much less interest over the life of the loan and pay your credit card debt off in a much shorter period.
DIY debt management
If taking a loan against your home is uncomfortable for you, and a personal loan does not meet your needs, then you can utilize a do-it-yourself approach to paying off your credit card debt. There are several methods to investigate, but all of them require dedication and discipline to be effective in the end.
One of the most popular and proven methods is the “snowball method.” It involves starting with the lowest balance, paying as much as you can against it every month, while paying the minimum amount due on the rest of the balances. Once that card has a 0 balance, you move to the next highest, pay as much as you can, plus what you were paying on the first card, and continue paying the minimums on the rest. This continues until all of the credit card balances are at 0. It is an effective means of repayment if you are determined and diligent.
Another way to pay off your credit card debt is to utilize the 3-year method. On the front of your credit card statement, you will find a box that outlines a couple of repayment scenarios. One calculation will show you the amount of interest you will pay if you choose to pay only the minimum on your credit card balance each month. The other will show you how much you need to pay per month to pay off your balance in 3 years. So, the plan is, you simply pay the amount specified every month on all your cards and you will be credit card debt free in 36 months.
Debt relief companies
Sometimes, the situation becomes critical, and the available debt consolidation options are not viable. Either credit scores have suffered to the point that additional credit is not available, or there is no asset, such as a home, to borrow against. If this is the case, the only option may be to work with a debt relief company such as National Debt Relief. Debt relief companies help consumers struggling with credit card debt settle their debt with the credit card companies. You stop paying your monthly payments and pay a lower amount into a trust account in your name. Once you save a predetermined amount, the debt relief company will negotiate a settlement with the credit card companies. The process takes some time, and you may damage your credit. However, the damage will not be nearly as bad as the impact of declaring bankruptcy.
There are many options for consolidating your debt. Sometimes, it just takes a bit of research and due diligence to find the right solution. If you are in deep credit card debt, don’t wait until you are facing bankruptcy. Get started today on finding the right solution for you.