Once upon a time, I was in debt. Each month, I had credit cards demanding minimum payments that when tallied up were on par with my rent. Each of my four credit cards had at least $1000 of debt that needed to be paid, and I was struggling to keep up with the rising minimum payments.
How did I get here? I asked myself.
It happens to the best of us. Roughly 80% of Americans are in some form of debt. Let that put you at ease, just as it did for me. Still, I knew that I didn’t want to be in debt for the rest of my life.
It was then that an ad came screaming onto my laptop screen that read:
“Debt Consolidation: BECOME DEBT-FREE!”
What is Debt Consolidation?
Debt consolidation is great for anyone looking to consolidate all of their debts – be they credit cards, car loans, mortgages, utilities, rent, student loans, etc – into a single account that requires a single payment.
A lender essentially buys your outstanding debt(s) and applies a single interest rate for all of them, along with a deadline when you’ll be expected to have paid off all the debt.
I’d never heard of debt consolidation, and frankly, it didn’t seem to make much sense. Why would I take out a loan to pay off all my other loans? What difference would it make if all of my debts were in one place?
After thinking about it, I scoffed at the ad and closed my laptop.
But that ad had planted a seed in my mind, and by the time I owed another volley of payments to my various credit cards, I needed to know more. What’s worse was my credit card debt was only growing, which meant the interest payments were hitting harder than ever.
The water was rising, and I needed to make a decision.
So I started researching.
Risk, and Other Downsides
It wasn’t hard to find a debt consolidation loan that seemed like a winner. Between the promises of lower interest rates and the longer loan terms, the debt-free dream began to feel more like an attainable reality. But being a skeptic, I know when a catch is coming.
That catch was Collateral.
Collateral is essentially property that a borrower will give to their lender should they fail to pay back their loan. In my case, my car was my collateral. This was a huge wakeup call for me, as my car was essentially my pride and joy. It’s also why I was in debt to begin with.
But consolidating debt has other side-effects, as it can hurt your credit. 15% of your credit score is measured by how much time you’ve had credit for. So if you have ten credit cards with debt on them, and abruptly you consolidate them into one single, then that kills ten lines of credit.
This essentially wipes away all of those years you’ve had those credit cards. For some, this is a dealbreaker.
Consolidating Debt Like a Pro
Believe it or not, there are people who will help you out of debt.
Organizations like the National Foundation for Credit Counseling (NFCC) do not work for profit. These organizations are often funded via charity, and exist to help people escape from the clutches of debt.
They still have fees, however, so research their fee structure and verify that they’re actually nonprofit.
Once you find the right firm, they’ll actually reach out to your creditors and lenders to negotiate better terms for your outstanding debts. The results will be your new monthly payment, which will be owed to them.
Once your debt has been consolidated, control your spending. The wisest among us just cut up their credit cards as a cold turkey way of curbing impulse spending. Make debt the very thing that comes between you and what you want.
The Lessons of Debt Consolidation
Debt consolidation is easy. Paying debt is not.
When I finally consolidated my debt, I thought I was pretty clever. My monthly payments were substantially lower, and I was saving hundreds each month. I even had about two years to pay it all off.
Unfortunately, two years isn’t a very long time.
By making the minimum payment each month, I’d never pay the debt in time. I had to put every spare penny towards paying the debt, and even still, it wouldn’t be enough to pay it all within two years. I knew I had to make some sacrifices.
Immediately, I found roommates. I sold my second laptop, old cell phones, and designer clothes on eBay. I completely stopped eating out, and didn’t drink on weekends. I even talked my lenders into letting me sell my car, to use my 401k as collateral.
After slashing my overhead, I realized that I needed to earn more, so I got a second job at a grocery store, so I could put all of the earnings towards my debt.
Every penny counts when paying debt.
The Light at the End of the Tunnel
It wasn’t easy.
One Sunday night, after about three months of tough work and no breaks, I came home from my grocery store job. One of my roommates greeted me with a hearty hello. Sundays are always terribly busy at grocery stores, and he could see that I was pretty frazzled.
I sat beside him on the couch, and began pouring through my phone. I checked my debt, and my heart sank. In just three months, I’d managed to pay off 30% of it. I’ll be debt-free within a year, I thought to myself.
Today I’m debt free, and cash flow-positive. It’s a feeling I never knew I wanted.
Debt consolidation is no joke. Lenders can be predatory, and they want you to fail to pay it. The unlucky ones among us don’t make the changes needed to succeed, and end up losing their car, homes, and livelihoods because they fail to meet the terms of their debt consolidation loan.
Debt consolidation is like rehab for bad spenders; if you fail to make the necessary spending changes, then you’ll drown in your bad habits. In my case, I had to downsize my life. The terms of my debt consolidation loan gave me two years to pay off everything, or my stupid car was going bye bye.
But it’s no magic bullet. I was the cause of the debt at the end of the day, and I needed to make some real changes. Thanks to the changes I made to my own habits, and the terms of the debt consolidation loan, I found my way out of debt.
Contributor’s opinions are their own. Always do your own due diligence before investing.