Debt consolidation loans is something I’ve considered in the past. However, another hard inquiry on my credit report is one thing that I did not want. Some credit unions will work with a low credit score and will come to an agreement with you.
Lets talk about if this is a good option though.
One thing to know about financing is that it’s not all about your credit score. It used to be that way. However, lenders are now looking at your debt to income ratio. What does this say about you and why does this matter?
A person that is making minimum payments on everything and keeping everything current can have a decent credit score. It’s not good to have too many accounts that you owe money to but if you’re keeping your account current, then there’s no negative marks on your record.
This is where your debt to income ratio comes in. I was $33k dollars in debt. I am now about $16k. However, lets go back to the time where I was making $33k in debt and making roughly $36k a year ($3000 a month). My debt was about 91% of my income. Now if I was current with everything and debt to income ratio did not exist, could I get another loan based on my credit score? Possibly.
Here is a general guideline to follow when you are looking to debt-to-income ratio:
- 36% or less: This is a healthy debt load to carry for most people.
- 37%-42%: Not bad, but start reducing your debt now before you get in real trouble.
- 43%-49%: Financial difficulties are probably imminent unless you take immediate action.
- 50% or more: Get help/advice to aggressively reduce debt.
My debt-to-income ratio was pretty bad. The way that lenders work today would leave me incapable of getting a debt consolidation loan through a very lenient credit union.
Lets say I took out a debt consolidation loan with a credit union. My debt would still remain the same and that is the key here – debt consolidation loans does solve any debt issues.
In today’s economic times, the sight of borrowed money seems may seem like a resolution to our debts. However, people in debt think short term instead of a longer term solution.
Here is a prime example of a time I borrowed money and it hurt me in the end. I had 80 dollars in my bank account for a week. I had to save $55.50 for my commute to and from work. I felt confined to cheap lunches and not being able to really do anything. So I took out a cash advance of $255 so that I can be more financially comfortable at the time. I scheduled my cash advance to be taken back from me a month later, however, instead of paying $255, I will be paying $300 because of the interest. That pay back coincided with my rent and I was looking frantically for money to cover my rent and not overdraw my account.
If you look at the bigger picture here, I could have saved myself the cost of the interest on the money I borrowed if I had just made the sacrifice. I could have made lunch at home and brought it to work with me. I could have saved the 25 dollars I would have had left over after my commute and put that away. It’s not a “huge” savings but when it comes to saving money, you just have to start somewhere. A little bit here and there can really build up.
When you borrow money ‘” bank loan, cash advance or otherwise ‘” you are not solving any problems and you will find yourself in the same situation months later from now. It is the habit of financing what we can’t afford, and financing what we’ve already financed that has driven a lot of people into debt. What we all need to adapt is to bite what we can chew, instead of going on the spending sprees that even I go on.
So if you ask me, do not take that debt consolidation loan. Go back to basics and build your budget from the ground up. Talk to your lenders and do not open any new accounts! Debt is really a vicious cycle. It’s just a matter of breaking out of it.