Should you take out a consolidation loan?

Balance Transfers and Consolidation Loans: Yes or No?

Balance transfers and consolidation loans can be powerful tools to help people eliminate debt faster. They can also be a train wreck leading to the accumulation of more debt.

How can you be sure that using one of these options to get debt under control is best for you?

Personally, we’ve used balance transfer and consolidation options that have saved us a ton of cash. We’ve also used these options and have had them lead to more debt and bigger financial trouble than we had in the first place.

I want you to avoid the mistakes we made using balance transfers and consolidation loans and to learn how to use them wisely as you pay off debt and build wealth – IF that is the right choice for your individual situation.

Here are some questions you can ask before you sign on the dotted line and reroute your debt somewhere else.

What to Ask Yourself BEFORE You Take Out a Consolidation Loan or Transfer Credit Card Balances to a New Card

Before you go through with a balance transfer or consolidation loan in order to get your consumer debt load under control, you need to have a serious talk with yourself.

There are some questions that need to be asked that will help you determine whether a balance transfer or debt consolidation loan will be a benefit to your debt payoff journey or a hindrance.

If you can be honest and get your head clear about the answers to the questions below, you can determine what method of debt payoff is best for you. That answer might be consolidation – or it might lead to just tackling your debt the way it is.

Remember that “money saved on interest” can’t be the only reason you choose to consolidate or transfer your debt. There are emotional factors that must be considered as well. If you don’t look at the whole picture and just jump into a consolidation, you could put yourself in an even worse financial place than you are now.

So read ahead, and be brutally honest with yourself.

Am I Really Ready to Live Within My Means?

I don’t recommend getting a consolidation loan or transferring credit card balances to a new card unless you’re really certain that you’re ready to stop borrowing and start living within your means. If you’re just using a consolidation loan in order to free up credit card balances so that you can borrow more money, you’ll likely end up getting yourself into even more debt than you were before.

Before you transfer your debt to another place, have that “man in the mirror” talk with yourself about where you want your life to go and about whether you’re really ready to stop borrowing money and start working toward financial freedom.

Be serious and make a list of the reasons why you want to be debt free. A journey to debt freedom generally won’t work unless the reasons you want to be debt free are more powerful and important to you than the reasons you are spending beyond your means.

Yep, you have to analyze that portion of the equation as well. Have a serious heart-to-heart with yourself and find out why you are spending beyond your means on a consistent basis and why you are unwilling to discipline yourself where your money is concerned.

Recommended Reading: The Emotion Behind Money: Building Wealth from the Inside Out

This probably won’t be the funnest of talks you’ve ever had with yourself. If you’re like we were, you may have some deeply hidden hurts from long ago that are causing you to choose the short term gratification of spending beyond your means over the long term gratification of getting out of debt and building wealth.

Related: True Financial Restoration Has to Come From the Inside Out

Discovering and healing from those hurts may not be fun, but the results of doing the hard work of healing have the ability to put you in a much better place if you’ll follow your healing plan through to the end.

How to Get Off the Credit Merry-Go-Round

How can you learn to stop borrowing and start digging out of debt? Read our 4-step process for beginning a “get out of debt” journey.

How and Why You Should Get Out of Debt – Intro

How and Why You Should Get out of Debt – Part 1, First Things First

How and Why You Should Get out of Debt – Part 2, Getting Through the Rough Spots

How and Why You Should Get out of Debt – Part 3, Staying the Course

Getting out of debt is a tedious process, but I know you can do it if you really put your mind to it.

Am I Ready to Stop Caring What Other People Think?

The process of ceasing to borrow money so that you can successfully use consolidation loans or balance transfers to ease your financial burdens and start getting out of debt isn’t an easy one.

Getting out of debt means that you’ll have to start budgeting, tracking your spending and making choices about which expenses to cut so that you’ve got more funds to put toward dumping your debt once and for all.

You might receive some flack from others once you decide to stop living above your means. They might write you off as a loon once you decide to forego the YOLO lifestyle in search of financial freedom and independence.

Be prepared for this, and stand strong in doing what’s best for you as you work your debt payoff plan.

And keep in mind that achieving debt freedom will have benefits that are far more powerful that those instant gratification purchases the world tries to talk you into.

I’ll be honest: You probably won’t get out of debt – even with consolidation loans or balance transfers – if you’re not willing to stop living your life based on what other people call successful.

As long as other peoples’ opinions are what dictate what you buy, wear and how you live, you’ll continue to have what you’ve always had: lots and lots of debt.

On the other hand, if you are willing to push aside the opinions of others in search of a much better life for yourself, you have a real shot at achieving debt freedom.

Setting aside the opinions of others might call for a drastic change in your life. In our case, we chose to move from an affluent suburb out to the country. We chose this not so much because we wanted to be away from the influence of the Joneses (or so we thought) but because we were just tired – oh so tired – of the rat race.

Life in the country where your nearest neighbor can’t see into your windows or what the inside of your house looks like without some serious effort is a huge wake-up call.

As we got used to being largely alone without the influence of others, we got real cozy with our financial numbers and finally had the guts to face them.

It was just our massive debt, our empty savings account and us, alone, in the cold, cold winters in a far away place. Nowhere to run, nowhere to hide, no nearby stores to drown out the truth as we shopped for more stuff.

It was just us and the playground bully without crowds to cheer us – or them – on.

We were faced with a choice: continue to live the way we’d always lives (and without the bonus of much-too-close neighbors oohing and aahing over our latest purchase).

Or facing the “bully” head on and fighting back.

It was a tough decision, not one without setbacks. Fighting our way out of years of spending habits and emotional messages that caused us to spend more than we made wasn’t easy, and there were LOTS of setbacks.

But we did it and are now almost completely debt free.

I encourage you to choose freedom. It’s much happier there. You’ll sleep much more peacefully at night.

Am I Willing to Go the Extra Mile and See This Race Through to the Finish Line?

Perseverance is, in my humble opinion, the most important ingredient for a successful journey out of debt. If you aren’t willing to persevere, don’t bother getting a consolidation loan or transferring balances.

With any journey out of debt, setbacks will come. You need to accept this, prepare in your head for this and be willing to stand strong when unexpected expenses or temptations to spend come your way.

You also need to be willing to step up your actions One of the ways you can step up debt pay off is through side hustles.

My friend David from Young Adult Money has a great new book called Hustle Away Debt: Eliminate Your Debt by Making More Money that’s being released in May. Pre-order it today so that you can learn David’s secrets for formulating a successful side hustle plan that will accelerate your journey out of debt exponentially.

Making extra money is key to getting out of debt faster, especially if you’re dealing with a high debt-to-income situation.

Doing Balance Transfers and Consolidation Loans the Right Way

If you are truly ready to stop living above your means and start dumping some serious debt, here are some tips for doing it right.

Use consolidation loans that will allow you to lower your interest rate AND keep payments affordable.

Personally, we used a Sofi low-interest rate consolidation loan to consolidate some of our credit card debt. We were able to cut our interest rate by nearly seven percent from what we were paying on some credit cards, lower our payment amount and have a guaranteed pay off date of less than seven years.

We found their customer service excellent from application to closing and beyond. It’s important to choose a trustworthy company when working to get a consolidation loan to help pay off credit cards. Make sure you read the fine print before agreeing to any consolidation loan.

It’s important to note that not all consolidation loans will benefit you. We talked with one company – a quality company with a fair interest rate (although not as low as the Sofi interest rate) that was willing to give us a loan. However, they wanted us to consolidate one of our zero rate cards into the deal.

It seemed silly to start paying ten percent interest on a zero rate card, so we declined the offer and continued on with our plans.

Before You do a Balance Transfer to a Different Card

We also used balance transfers for some of our credit cards in order to lower interest. Just like with consolidation loans, it’s vital to read the fine print before agreeing to a credit card balance transfer.

Pay special attention to the promotional interest rate, the term of the promotional rate, the balance transfer fee and the penalties that the credit card applies if you make a late payment. Many times credit card companies will void the promotional rate if you’re late on a payment.

This is why sticking to the terms and making your payments is crucially important when you’re taking advantage of a credit card consolidation offer. Although the rules have changed thanks to government regulations, you can still end up with a high interest rate and ridiculous fees if you don’t stick to the terms and make your credit card payments on time.

A Word About Extra Income

Extra income can really be a huge help if you are working to pay off credit card debt. You can make more money by working overtime at work, by picking up a second job, or by doing one of the many side hustles that allow you to make money in your own way, in your own time.

Consider finding a way to make some extra money to put toward those credit card or loan balances.

Don’t allow yourself to be sucked in by balance transfer and consolidation loan offers if your mindset is not where you want it to be about the future of your money and your life. But if you’re truly ready to start living a life free from debt, use these valuable tools to accelerate your journey to debt freedom, and start your debt payoff journey today!

Have you ever used consolidation loans and balance transfers before? If so, did they help your financial situation or simply help you to get into more debt?

 

*Image Credit: Flickr

25 comments

  1. Josh says:

    Thankfully I’ve had enough cash in the bank to cover the monthly credit card bills. I will admit the 0% balance transfers sound like a neat option (from a procrastinator’s point-of-view) because it means you can delay paying the bill for a little while longer.

    But I’ve realized that’s like playing with fire, so I haven’t found a good enough reason to go down that path yet.

    • Laurie says:

      Good for you, Josh!! Yes, I think you have to be so careful with these types of deals. It’s real easy to start viewing them as “free money”.

  2. My co-worker just took out a loan with lending club to pay off some of his high interest credit card bills. He cut his interest rate in half so it absolutely makes sense. But the letter that came with the loan said that to make sure you don’t accumulate more debt otherwise it will all be for nothing. So unless you make sure you are ready to live below your means and to stop taking on more debt, taking a consolidation loan is just bailing water from a quickly sinking ship.

    • Laurie says:

      I think it’s great that the loan came with a letter saying to make sure you don’t accumulate more debt. Maybe some lenders are starting to realize that increasing debt for their customers means increased risk for their companies.

  3. I agree that you should be cautious before taking out a consolidation loan or a new credit card to make a balance transfer. I used both methods in the past which helped me tremendously and saved me a lot in interest charges.

    • Laurie says:

      They can absolutely be amazingly helpful tools, provided one has the right mindset. We use them as well, but only as an effort to reduce our debt load faster.

  4. These can be useful tools, ONLY if you stop accumulating NEW debt. If you don’t change your behavior you will only add more debt and be in a bigger hole than before. The math is easy, the mindset is tough!

    • Laurie says:

      So true, Brian!! We’ve done that in the past: consolidated, got comfy with the new payment and “no debt” and then wracked up credit card debt again. It can be such a vicious circle of you’re not careful.

  5. I have a friend who has just done the debt consolidation thing . . . for the third time. Her debt is higher than ever, and she feels unequal to the challenge of taking it on. She’s allowed me to be her accountability friend through this, but I’ll have to watch it. It’s such a sensitive issue, and while I don’t want to overstep my bounds, I want to do what I can for her to face this beast.

    • Laurie says:

      Ruth, I think you’ll do a great job of being honest and yet doing it sensitively. She can learn so much from your experience!

  6. Though I don’t have experience with this subject, I think the questions you’ve laid out for people to think about are invaluable. These types of decisions really work best when the goal is to change habits and get out of debt for good.

  7. I have “kind of” used consolidation loans. We take out loans for my wife’s masters degree and there is always a ton of money left over. We compare the interest rate on those loans to our existing undergrad student loans, and if it’s less than the grad student loans we use it to pay off the undergrad loans. We also get car loans through Light Stream and pay them off as slowly as possible because they are something like 2% interest. So I don’t consolidate per se but I always focus on the highest interest rate.

    Also – thanks for mentioning my book! I really appreciate it!

  8. Miranda says:

    You’re right to question whether or not people will view this as more opportunity to go further into debt. It’s hard to come to the realization that its a lifestyle change as well. Good information, Laurie!

  9. Balance transfers and consolidation loans are great, but you definitely have to have your spending under control first so you don’t rack up more debt as soon as the transfer is done.

  10. Kelly says:

    Perseverance is really a key in getting out of debt. It’s really hard to do this, but once practiced, I know for sure that it guarantees success in getting out of debt more easily.

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