Money Rehab with Nicole Lapin - How to Consolidate Debt

Episode Date: September 27, 2021

You may have heard that debt consolidation is one option to help get that debt monkey off your back. Today’s episode is all about unpacking the nitty gritty of debt consolidation, and how to decide whether it’s the right move for you.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I know firsthand how overwhelming debt can be.

I've been in debt myself, and I know how hard it is to see the light at the end of the tunnel, or even know if there is a light at the end of the tunnel. Today, we're going to be talking about one particular strategy for getting your debt monkey off your back. This topic comes to us from listener Mari. Hey, Nicole. My name's Mari, and I'm a sales rep in Florida. I have debt from a few different things, and I'm having a hard time figuring out how to pay it off. I keep getting targeted ads for debt consolidation loans, but I'm not really sure what that means or what the advantage is. Can you explain it to me? Absolutely, Mari. Thank you so much for calling in about this. I

am happy to give you the 411 on debt consolidation. So without further ado, let's get into it. Believe it or not, debt consolidation is kind of what it sounds like. At its most basic level, if you were to go for a debt consolidation option, Mari, you would smush all of your debt together in one big debt sandwich, and then you would take out another loan to eat up your debt sandwich. So then instead of paying the monthly payments on your various debts like you're doing now, you would just be paying back one big daddy loan. You can opt for debt consolidation across many different types of debt, home equity loans, student loans, credit card debt. Typically, there's some sort of better

financial deal with a debt consolidation loan, like a lower interest rate than what you were paying before. You can apply through your bank, credit union, or credit card company. There are also private lenders, but a word to the wise, you should go with someone you trust. There are two types of big daddy loans, aka debt consolidation loans. Secured loans, which are backed by an asset that you own, like a car or a house. And then there are unsecured loans, which are not backed by anything other than your word, which of course is valuable, but it's not a thing. As you may have guessed, unsecured loans are a little bit harder to snag because the lender has less cushion in case things go south. So they want to be extra careful about who they get into bed

with, so to speak. To sweeten the deal for lenders, unsecured loans tend to have higher interest rates. The Federal Direct Loan Program also offers consolidation for people with federal student loans where they, as debt consolidators do, mix all of your debt together. With these programs, your new interest rate is set to the weighted average of the interest rates of your different debt sources. There is also the option to consolidate debt onto one credit card. With some debt consolidation cards, there will typically be an introductory period with 0% interest, typically lasting six months to two years. The strategy with these cards is to pay off all your debt during the period when you're not accumulating interest, because everything you put

down goes straight to the principal, baby. Now, how this last credit card option affects your credit score depends on you. It's also possible that a debt consolidation might help your credit score. If as you're consolidating, you close other credit lines, you could make your utilization score go up, which of course we don't want, right? However, on the flip side, it could help your credit score by paying off the credit that's bogging down your utilization score. You might be thinking, Laban, are you telling me that doing one thing could have opposite effects on my credit score? Yes. Yes, my dears, I am. That's because there are many different types of debt consolidation programs, and how they work for you is, again, up to you.

In general, I would say that credit consolidation programs are a good fit for people who have debts that are clocking in at around the same interest rate. If you're paying back two loans, one has a 2% interest rate, and the other has a 6% interest rate, well, by now you know what I'm going to say. Focus on the 6% interest-bearing loan. Always focus on the debt with the higher interest rate first. But if you have multiple loans that are all snowballing around the same interest rate, you may benefit from consolidating your loans. Debt consolidation might also be a good fit for you if you're feeling generally overwhelmed

by this. Instead of juggling many different types of debt, which can feel super nerve-wracking, loan consolidation gives you the benefit of having one source of all the debt on your shoulders. Plus, with a debt consolidation loan, you're likely looking at a fixed term. So instead of paying the minimum on your credit card bill every month and not knowing when the cycle will end, a debt consolidation loan gives you that end date. But like the credit card option I mentioned, whether debt consolidation helps or hurts you is really on you. So to decide if you should move forward with the debt sandwich, I want you to answer three questions. Number one,

will your current lenders lower your rates? Before taking out yet another loan, first see if there is any wiggle room in the loans you already have. By now, I hope you've called your credit card company to negotiate your APR, but have you tried calling up other lenders, like your mortgage lender, and seeing if they can lower your interest rate? If no, well, you're never as young as you are today, and it's never too late to start. Consult your negotiating notes and call your lender. Be sure to mention all the times you've paid on time and any credit score boosts you've had as of late. Number two, how's your credit? For a debt consolidation program, you typically need to have pretty good credit to qualify. I'm talking 690 or higher.

If you have a lower credit score than that, you may still qualify, but your interest rates will be higher than your pals with better credit. If your credit score isn't in tip-top shape, I'd recommend working on that first so that if you apply for a debt consolidation plan, you'll secure a lower interest rate. And remember, a debt consolidation lender will issue a hard credit check, which will ding your credit score and haunt your credit report for two years. Number three, are you paying more in the long run? Just because a debt consolidation loan displays a lower interest rate than what you're paying now doesn't mean you'll owe less in the

long run. Debt consolidation loans may have fees that end up costing just as much as the interest rate on your current loan. Plus, even if your interest rate is lower, you may be paying back the loan for longer, which, if you do the math, may add up to a bigger expense in the end. Not to mention, sometimes those interest rates are adjustable, meaning it could increase down the line. So you really want to pay attention to that. Don't just think you have a sweet low interest rate for so long. Also, if you miss a payment, that sweet low interest rate you love so much, well, you can kiss that goodbye too. For today's tip, you can take straight to the bank. If debt consolidation sounds like a good fit for you, you should shop around a lot.

Mari, this is one time I'm going to tell you to shop your heart out, sister. You shouldn't just decide to apply on a loan that came up as a pop-up ad for Instagram. Not all debt consolidation loans are created equal, so you really need to find one that actually works for your specific circumstances. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Costarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always,

thanks to you for finally investing in yourself so that you can get it together and get it all.