Beating Broke

Personal Finance from the Broke Perspective

Debt Consolidation Loans: What, When, Why

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Many of us have heard of debt consolidation loans.  Some of you might have even used one before.  They’ve gotten a bit of a bad rap over the last few years because they get associated with debt consolidation companies, some of which can be a bit shady.  But, they aren’t all bad.  And, in some cases, they can be a very useful tool in your debt repayment strategy.

Debt Consolidation Loans: What Are They?

The concept is actually pretty easy to grasp.  As the name implies, a debt consolidation loan is a loan that consolidates all of your other debt and puts it all under one single loan.    Depending on the lender, you can consolidate just about any debt.  We’ll talk about some of the things you might not want to consolidate in later.  For many, the prospect of trading their high interest credit card debt for a lower interest rate loan can be very enticing.

Debt Consolidation Loans: When Should They Be Used?

While you can get a consolidation loan at any time, there are a few times when they are of the most use.  The most common of these is when you have several credit cards that have high balances and higher interest rates.  As we all know, paying only minimum payments won’t get us very far, but having several cards to pay sometimes leaves us with little left over to pay extra towards those balances.  A consolidation loan can reduce the interest rate, and reduce the payment amount, making it easier to pay extra on the balance. One of the biggest factors to determining if you should use a consolidation loan is your resolve to stay off the debt treadmill.  If you can’t commit to not adding any more debt, you’ll only find yourself worse off in the long run.Bank Debt Word Cloud

Debt Consolidation Loans: Why Should They Be Used?

A debt consolidation loan can be a great tool when you’re working on paying off your debt.  The reduction in interest rates and payments can help ease the burden of your debt while also enabling you to pay off the debt at a quicker rate.  Again, if you aren’t committed to not adding any more debt, and you start using those same credit cards again, you’ll find yourself in a much worse situation than you were before.  Combined with a commitment to no more debt, they are a great tool.

Debt Consolidation Loans: Caveats

With anything, there are a few things that you’ll need to watch out for.  Besides reloading your credit cards, that is.  Some lenders will attempt to roll a car loan or a home equity loan into the consolidation loan.  Only do that if there is no other option.  Why?  Both the car loan and the home equity loan are what are called secured loans.  There is some physical asset that the lender holds title to should you default.  If you roll either into the consolidation loan, you don’t own that physical asset until the consolidation loan is paid off.  Consider this example.  You have a car loan for $5000, on a car that has a value of $10000.  You roll that car loan into your consolidation loan along with $20000 in credit card debt.  The total for your consolidation loan is then $25000.  Until you pay that $25000 off, the lender will keep it’s lien on the car.  What if you get in a wreck and total the car?  You can’t use it as a trade-in, or sell it to a salvage yard until that $25000 is paid off and you can get the lien removed from the car.  It’s a hairy situation to be in, to be sure.  All that said, getting an unsecured loan can sometimes be difficult, and depending on your situation, some lenders might require at least part of the loan be secured.  You’ll have to determine if that’s a risk you want to take in order to take ownership of your finances.

Much like any other financial tool, a debt consolidation loan can be helpful under the right circumstances.  Be careful, examine the details, and learn how it works, and you can make sure that it remains that way.

photo credit: Vectorportal

Don’t Be A Fool, Focus On School

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The back to school season is upon us, and many newly graduated high school students will head off to college for the first time.  More than ever, college students feel financial pressure.  The cost of college tuition continues to rise, and a student is often forced to decide to go into student loan debt to pay for her education or to work many hours to try to pay for the tuition without going into debt.

As a former college teacher I have a few thoughts on the subject.  If a student is going to college full-time, I cannot stress enough that school should be the main focus.  If a student needs to work, he should work part-time, 10 to 20 hours a week.  Yes, there are plenty of college graduates who brag that they worked full-time and went to school full-time and did just fine.   Yet, what were their grades?

Graduated!

I routinely had students in my class who worked full-time and went to school full-time.  In this scenario, education almost always gets shortchanged.  A student cannot neglect their employment, or they will be fired.  Instead they neglect their school work and get low grades, often not even passing grades.  A good rule of thumb is that for every hour in a credit course, plan to study three hours outside the class for a liberal arts class and four hours for a science or math class.  That means a student taking a 3 credit hour rhetoric course should plan on spending 9 hours outside the classroom doing homework.  If the student is taking a 4 hour anatomy class, he should plan on spending 16 hours outside the classroom on homework.  A full load of classes can range anywhere from 12 to 18 credit hours.  Those hours represent the time spent in the classroom.  Even if all the classes are liberal arts classes, the student should still be putting in 36 to 54 hours on homework a week to obtain optimal grades.  So, be sure to take your degree options into consideration when deciding on a job. Because, unless the student doesn’t plan on sleeping, working a full-time job is too much.

There is nothing wrong with reversing the situation and working full-time to avoid taking on student loan debt.  However, the student should only commit to taking a maximum of 2 classes a semester to obtain optimal grades.

College students should accept that they can’t do it all.  Either go to school full-time and work part-time and accept that you will have to pay off debt when you graduate or work full-time and go to school part-time and accept that you will graduate debt free, but it will take longer.  If a student takes on too much and earns low or failing grades, they have ultimately just wasted their time AND money.

photo credit: ralph and jenny