Are you a slave to your debts? Many Americans are. As of July of this year, the average household credit card debt was $7,149 and the average indebted household debt was $15,325. Since that $15,325 is just an average, you can imagine how much more debt some people are carrying. If you owe this much or more and are having a problem making just your minimum monthly payments, you may be a slave to your debt.
Why you might not ever get out
If you want to learn how bad things really might be, you need to collect all of your credit card statements, check the minimum monthly payments you’re supposed to be making and compare them with the interest you’re paying. If you find that your minimum monthly payments are about the same as the interest you’re being charged, you’re a slave to your debt and may never become debt free. I read one article recently about a couple that was so far in debt that it would take them 28 ½ years to become debt-free – if they just continued to make their minimum monthly payments.
A credit consolidation loan
Many people get a credit consolidation loan as a path out of debt slavery. However, it’s not the ultimate solution because as one very smart person once pointed out, “you can’t borrow your way out of debt.” There are some benefits to getting a credit (or debt) consolidation loan so long as you understand that you’re only moving your debt from one set of creditors to another – and that you’re not eliminating it.
The pros of a consolidation loan
A consolidation loan may not be a direct path out of debt slavery, but it can be a good way to control and manage your debts. Also, it’s a kind of quick fix because if you can qualify for one you will be able to pay off all of your creditors simultaneously and have just one monthly payment instead of the multiple ones you have now. Your payment should be far less than the total of the minimum monthly payments you’re currently making and you should have a much better interest rate. For example, if you are typical your credit cards probably have interest rates as high as 18%, 20% or even worse. In comparison, you might be able to get a credit consolidation loan at 5% or even better.
Secured vs. unsecured
Debt consolidation loans come in two flavors – secured and unsecured. Unsecured loans are often called signature loans because if you qualify for one about all you have to do is sign for it. Unfortunately, if you owe $10,000 or more you may find it very difficult to get an unsecured loan. This is because these loans are much riskier for lenders than those that are secured or where you have to pledge an asset as collateral. In most cases that asset will be your house – assuming you have enough equity to cover the amount of money you will need to pay off all your debts. If you have a 30-year mortgage and have been in the home for less than 10 years, it’s unlikely that you have enough equity because virtually all the money you’ve paid to date has gone against interest. Once you cross the 10-year mark, more of your payment goes towards paying down your balance. So if you’ve been in the house 12, 15 years or more you may have enough equity to do a refi and pay off all of your debts.
The negative of a credit consolidation loan
The biggest downside to a consolidation loan is how long it will be before you’re debt free. In most cases, it will take five, seven or even 10 years to pay off the loan. That’s a very long time and one during which you will have to be very, very careful about not taking on any new revolving debt.
Not the best solution but maybe your best option
As you have read, there are both pluses and minuses to a credit consolidation loan. While it may not be a path out of debt slavery, it might very well be your best option. And it’s probably something you would want to discuss with your bank or credit union.