Got Debt?You start with a few little debts here and there and suddenly you’re a few thousand deep.
Get a LoanWouldn’t it be nice to only make ONE payment a month? Get a debt consolidation loan!
No, Really!Getting a loan to pay off debt seems contradictory, but it simplifies everything AND saves you money.
Becoming not only financially independent but financially equipped to deal with being alive is much more difficult than many of us were ever taught. From checking and savings accounts to credit cards and loans that enable you to buy both fun and basic things, there’s a lot to keep track of. If you started out on your own and ended up with a lot of loans, we understand.
One way many young people are dealing with loan and credit card debt is by getting a new loan. That’s right — a bigger one. Well, not bigger. But different. It’s called a debt consolidation loan.
So how does debt consolidation work? You get a loan that equals the total amount of your other debts, then use that loan to pay off the debt. Now all you have to worry about is paying off one loan. Whew.
Think getting a loan to deal with debt seems contradictory? We don’t blame you. We sat down with Business Development Manager at T&I Brian Tuscany to learn more about why people should consider debt consolidation loans and why it’s better to use a credit union instead of a bank.
When to Consider a Debt Consolidation Loan
When the Little Debts Start Piling Up
Okay, so you’ve got some debt but you’re thinking, “I don’t know if I need to consolidate it at this point — it’s not that bad. I can handle it.”
First of all, we’re proud of you for being so brave. Second, we asked Brian Tuscany when someone should start to think about a debt consolidation loan. His answer? Once you’ve hit the $5K mark in terms of total unsecured debt.
“When you get around that four to five thousand dollar mark, that’s when you have to start looking at other options,” Tuscany explains. “If that debt is on a credit card, you’re going to be hurt by the interest the credit card company charges you.”
How does debt consolidation work? It’s cheaper, and you can pay your debt off faster. The max limit on these types of loans is $10,000 at T&I Credit Union, but Brian says that people will often get loans for as little as $900.
When You Need a Lower Interest Rate
The benefits of a low interest rate: you don’t have to pay as much. Next slide.
Okay, kidding, that’s not the only benefit. But it is the first thing that comes to mind, right?
Lower interest rates help you save money in interest, sure. But they can also help you save money in the short term (through lower monthly payments) or the long term (by cutting down the time it’ll take to pay off the debt).
And if you work with a credit union, you may even get some of that interest back.
“The whole base model of credit unions is to pass their earnings back down to their members,” says Tuscany. “We have a pretty unique program where we give 10% of the interest that members paid on loans throughout the year back to our members at the end of the calendar year.”
Just in time for the holidays!
When You Need to Simplify
One of the most overwhelming parts of having multiple small debts is remembering to pay and figuring out how much to pay. I’m getting sick just thinking about it. So how does debt consolidation work?
It simplifies this process.
“It’s just a lot simpler,” says Tuscany. “We’ve gotten a lot of good feedback from our members that they feel less stressed knowing that they just have to make the one payment every single month … and they feel that they’re more financially capable of doing it. It’s not as overwhelming as the multiple payments.”
Instead, you can focus on one payment at a time, which most of us are better at anyway.
Why Not Get a Debt Consolidation Loan?
There are a few main fears that stop people from considering a debt consolidation loan. Many people get scared off — reasonably so — by the idea of applying for the loan only for their credit score to go down. While your financial institution will have to do a credit check, the money that you could be saving is going to outweigh the 10-point drop on your credit report.
Plus, you quickly gain those points back by:
- freeing up any available credit on credit cards once they’re paid off, and
- paying off the more reasonable loan on time each month.
Loans in general tend to frighten people, especially when you’re in debt. This is understandable, and oftentimes when you have poor or even just mediocre credit, banks will immediately write you off.
Brian explains that credit unions work harder to get you approved for the loan, whereas a bank will often deny the loan and move on.
“If you apply for a debt consolidation loan with Bank of America, for example, and they see that you have a 600 credit score, they’re not going to give a second thought,” says Tuscany. “They’re just going to send out a piece of mail saying you’re disapproved because of your credit score.
“At a credit union, we look at the full history of your past payments and why your credit score got to where it was. Are you showing that you’re capable of making solid on-time payments monthly? Do you have a high enough gross income to be able to have the means to pay back that loan?
“We do a full in-depth analysis before just picking up the phone and saying solely based off of your credit score, ‘Hey, you’re not approved.’”
What Comes Next?
Once you’ve got your debt consolidation loan, it’s time to develop a new game plan that doesn’t lead down the same path. There are plenty of reasons people get into all kinds of frustrating financial situations; the point of a debt consolidation loan is to take control of your finances so you can stress less and spend more wisely.
If you haven’t already, it might be a good idea to reconsider where you store your finances as well. Most big banks have set up their systems with the primary goal of getting as much of your money as possible in the form of fees and high interest rates. At a credit union, you get more benefits, not to mention human beings who view you as a human being as well.
“At our credit union specifically, we joke that we’re a fee-free credit union,” says Tuscany. “You almost have to go out of your way to have a fee with us basically.”
Many credit unions have similar mindsets — whereas banks charge you just for being poor. They charge us money for having no money! Looking at you, overdraft fees.
Get a Credit Union on Your Side
So now that we’ve answered your question, “how does debt consolidation work?” why not go to the nearest big bank and apply? Well, hold on. As we just mentioned, big banks care less about you as a person than credit unions do — in fact, we could argue they don’t care about you at all. (We won’t, but we could.)
At a credit union, you not only get people who want to actually help you, but in many cases, you get systems, programs and people designed to provide that help in real, tangible ways. For example, Brian says that at T&I Credit Union — and many others — there is an in-house financial counselor that any member can sit down with, free of charge, to go over your finances.
The current pandemic, too, is shedding even more light on how little banks really care about their members.
“One unique thing that we’re doing is offering skip-a-pay to our members,” says Tuscany. “If your job was affected by COVID-19, you had the option to skip up to three payments with us. [We’re] more lenient with the payment structure for our members.”
So if you’re looking to start working towards a better financial future, a debt consolidation loan from a credit union might be the best route to take.
Business Development Manager, T&I Credit Union