Heres Why You Would Want To
- You have more than one car payment with different due dates and want the relief of having one payment to keep track of
- Your current interest rate is high and you may be able to lower it
- Your current monthly payment is high and you may be able to lower it
- Your credit score could use a boost
As with all debt consolidation options, there are benefits and drawbacks to consider. For auto loans, well cover each loan type, its pros and cons, and some alternatives to consider.
How To Transfer A Car Loan To A Credit Card
If you can transfer your car loan to a credit card and then pay in full, youll get the intro APR without any balance transfer fees.
But some loan issuers only permit payments via check, cash, ACH direct transfer or money order. In that case, you can use the balance transfer checks that came with your new credit card.
You can also do a balance transfer direct from your car loan company to your credit card issuer. Youll need to provide your issuer with your loan account number, the address where youd mail payments and the name of the loan company. If youre used to making online payments, its a good idea to call your loan provider to confirm this information.
When you use a balance transfer check or initiate the transfer through your credit card issuer, you could pay balance transfer fees.
Before you make the transfer, get answers to these questions:
Will the creditor that holds your car loan permit you to use a credit card to pay the loan balance? If you cant use your credit card, can you use a balance transfer check to pay the balance? Are there any penalties for paying the car loan early? How much will you pay in balance transfer fees? How long does the intro APR last?
Recognize The Warning Signs That Might Lead To Debt Consolidation
Thats the basics of debt consolidation.
If youre still with me, Id like to take a look at some of the bigger financial trends and data from Canadian families in financial distress.
With lock-downs, government programs, and few options for big-ticket purchases , COVID-19 pushed Canadians into a new direction: responsible saving.
According to the CHMC, the Canadian debt-to-income ratio declined to levels not seen since 2010.
While this is a promising trend in the short-term, in 2021 as life returns to normal, well see old habits return: buying bigger houses, dreaming about vacations, and returning to confidence about our futures.
If we zoom out of 2020, we see dangerous levels of debt and risky financial behaviors.
Since 2009, bankruptcy filings have actually declined in Canada. But the decline in bankruptcy filings does not necessarily mean Canadians have improved their financial security.
New legislation, methods like debt consolidation and consumer proposals, and other factors have opened up avenues for dealing with extreme debt beyond just insolvency.
Most researchers tend to look at bankruptcy to build a picture of Canadians in financial distress. But a family can be in financial distress well before being in a situation of bankruptcy.
For example, one study analyzed the use of payday loans in Canada. It found that the number of payday loan operators has grown, as has the total volume of loans per operator.
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Want To Chat About Your Options
If you would like to explore your refinancing options, please dont hesitate to contact me. Id be happy to put together some scenarios for you to think about, so you can figure out if a consolidation is the right solution for you.
To dig a little deeper, check out my articles on , bruised credit and protecting yourself from bad credit.
What Do I Need To Know If Im Thinking About Consolidating My Credit Card Debt
When you consolidate your credit card debt, you aretaking out a new loan. You have to repaythe new loan just like any other loan. If you get a consolidation loan and keep making more purchases withcredit, you probably wont succeed in paying down your debt. If youre havingtrouble with credit, consider contacting a credit counselor first.
Consolidation means that your various debts, whether they arecredit card bills or loan payments, are rolled into one monthly payment. If youhave multiple credit card accounts or loans, consolidation may be a way tosimplify or lower payments. But, a debtconsolidation loan does not erase your debt. You might also end up paying moreby consolidating debt into another type of loan.
Before you use a consolidation loan:
- Take a look at your spending. Its important to understandwhy you are in debt. If you have accrued a lot of debt because you are spendingmore than you are earning, a debt consolidation loan probably wont help you getout of debt unless you reduce your spending or increase your income.
- Make a budget. Figure out if you can payoff your existing debt by adjusting the way you spend for a period of time.
- Try reaching out to your individualcreditors to see if they will agree to lower your payments. Some creditors might be willing to accept lower minimum monthlypayments, waive certain fees ,reduce your interest rate, or change your monthlydue date to match up better to when you get paid, to help you pay back yourdebt.
Home equity loan
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Consolidate Debt With Loans Or Lines Of Credit
Not only will debt consolidation help you better organize your monthly payments, but it should also allow you to pay less in interest than all your previous rates combined. Here are just a few ways you can combine and manage your debt:
- Apply for a debt consolidation loan, and then pay just the single monthly payment on your new loan
- Open a line of credit rather than taking out another loan, then repay the line of credit as you use it
Borrowing From Your 401
Most employer-provided retirement plans permit participants to borrow from their own savings. Since it’s your money, there’s no credit check or qualifying hoops to jump through. You can generally borrow up to half of your vested retirement balance, up to $50,000. The interest rate may be one or two percentage points higher than the Prime Rate, which recently was around 4%. You usually have up to five years to pay back money used for consolidating credit card debt. Miss that deadline and you may owe income tax and potentially a 10% fee on the remaining balance.
When weighing whether borrowing from your workplace retirement plan makes sense, keep in mind that if you leave your jobvoluntarily or notyou typically must repay a loan within 60 days. If you don’t get it paid off in time, the loan morphs into a withdrawal, and that can end up costing you plenty. If you are under 55 you will owe a 10% early withdrawal penalty, and a withdrawal from a traditional 401 account will also be taxed at your ordinary income tax rate.
Another consideration is whether you want to touch your savings that will support you in the future, to pay for a cost today.
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Refine Your Debt Paying Strategy
Once you’ve consolidated your debts into as few loans or payments as possible, you may still have to prioritize the debts you can afford to pay first. There are two schools of thought on this.
Pay off your highest interest loans firstSome financial experts will advise you to tackle the highest-rate debt first because interest is accruing at a brisk pace. If the loan balances on your high-interest debts are within your reach to pay, this can be a good strategy. However, the debt with the highest interest rate may also be the largest loan or debt you have, meaning it will take longer to pay it off and make a dent in your overall debt load.
Pay smaller loans firstEliminating several smaller loans and debts first may be a better solution. You’ll reduce your overall debt load, and get the satisfaction of having some initial success.
What To Think About Before You Consolidate Your Debts
Now, what do you need to consider before you think about consolidating your debt? Well, we mentioned lower payments, and lower interest rate guarantees. But, there are other factors too.
Debt consolidation loans will often come with fees for loan set up as well, although this is not always the case, they may include fees for balance transfer, closing costs, and sometimes even annual fees as well.
Consolidating your debts does not mean that you will eliminate debt, and it is different from debt settlement, although both can scam you out of thousands of dollars.
You should always look into your spending before you decide to consolidate.
Understand why you are in debt, and if you have accrued a great deal of debt due to overspending then debt consolidation probably will not actually help unless you are willing to reduce your spending, or increase your income to match your spending.
This means that making a budget to manage your finances alongside the consideration of consolidation can be very useful.
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I Have Bad Credit Can I Still Qualify For Debt Consolidation
Unfortunately, its much harder to get a consolidation loan if you have bad credit. Creditors use your credit scores and payment history to determine risk. If you have not always been able to pay your existing debts most lenders will see this as a red flag.
But if you can offer security or a strong co-signer the lender will be more willing to work with you. Make sure you fully understand the interest rates and fees before agreeing to a consolidation loan as with bad credit these can be substantially higher.
Unsecured Debt = Bad Debt
The difference between credit card debt or unsecured debt, versus a mortgage, can mean thousands of dollars. As you may know, the interest you pay on a credit card or unsecured credit line is typically much higher than on your mortgage. Because of this, using your home equity to pay off your high-interest credit card debt can save you money in the long run.
That said, deciding whether it makes sense to refinance your mortgage will depend on your individual situation. Either way, with the right plan in place, you can be well on your way to a strong new financial life. If a consolidation is the way you decide to go, every month you could be seeing the difference: a boost to your monthly cash flow, one easy payment, faster debt paydown, and potentially thousands of dollars in interest savings.
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Can I Consolidate My Student Loans And Other Debts Together
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How To Consolidate Credit Card Debt Without Hurting Your Credit
Consolidating credit card debt has an initial temporary negative impact on your credit score. When you apply for a new credit account to consolidate your debt, like a personal loan, your lender typically runs a hard credit check, resulting in a hard inquiry. Hard inquiries drop your credit score by up to five points. While these inquiries stay on your credit report for two years, they only impact your score for one year.
However, you can take steps to combat this temporary drop and boost your credit score over time. For example, if this is your first time applying for a personal loan, it will improve your credit mix, which makes up 10% of your FICO score. Once you open a debt consolidation loan, you can boost your score by making on-time or early paymentsyour payment history makes up 35% of your FICO score.
So while youll most likely experience an initial temporary drop in your credit score when consolidating your credit card debt, you can rebound your score by following responsible credit practices.
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What Are The Pros And Cons Of Consolidating Car Loans
Unlike credit card loans, auto loans will usually have a low-interest rate, however they are secured loans, so there will be collateral i.e. your car.
No loan is a cakewalk, however, secured loans do mean that if you do not pay back your loan in time, then the loan provider can take repossession of your collateral- your car.
So, when you decide to consolidate your auto loans, what is good about it, and what is bad about it?
You May Earn A Lower Interest Rate
You could pay 20% APR or more if you carry a credit card balance, although borrowers with excellent credit could pay roughly 12% to 17%, depending on the type of card they own.
Personal loans, on the other hand, charge an average interest rate of less than 10%. The best personal loans are even cheaper than that if you have a high credit score. That means you could cut your total interest payment in half and even pay off your debt sooner since youll be paying less in interest.
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How To Merge Your Two Car Loans Into One
Consolidating multiple auto loans can lead to reduced monthly payments at a lower rate. Auto Loans 101
Combining multiple lines of credit into a single, lower payment is not a novel concept. In fact, its a common practice in the credit card market, through consolidation methods like . However, one uncommon method of combining debts is available for car loans.
If you havent heard of auto loan consolidation, youre probably not alone. Although this payment option isnt as widely discussed as others, it can be the right solution for managing loan balances and possibly even saving money on auto loan rates. Americans owe over $1 trillion in auto loan debt, according to Automotive News considering that fact, auto loan consolidation could alleviate a major financial burden.
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The Cons Of Debt Consolidation
Debt consolidation does have a few disadvantages You may save on interest charges, but will still have your debt. So, you will still have to work hard to repay the money you borrowed.
You may still have access to your credit cards dont be tempted to use them and go further in debt.
Financial institutions will expect prompt payments and if you found the debt hard to pay before it may still be a challenge to repay the new consolidation loan.
Also, some people use a co-signer to get a consolidation loan. If you cant make your payments, your co-signer will be left with your debt.
People often use their houses as collateral. If you cant make the payments, youll risk losing your home.
Over the past five years, there are fewer and fewer unsecured consolidation loans given. This is because the bank that gives you the loan takes on all the risk of losing it if you cannot pay it.
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Will Consolidating Your Credit Card Debt Reduce Your Interest Rates
One of the main benefits of consolidating your credit card debt is getting a reduced interest rate. Reducing your interest rate allows you to lower your monthly payment and, hopefully, pay off your debts sooner. But if you can’t lower your interest rate with a consolidation loan, then it’s probably not worth the extra cost and fees you’ll incur consolidating.
What Is A Credit Card Consolidation Loan
A credit card consolidation loan lets you roll multiple high-interest credit card debts into a single loan with a fixed rate, term, and one low monthly payment. It can help you save money over the life of the loan with a lower interest rate and put you on a path to paying off debt faster. Depending on your credit profile, a credit card consolidation loan could help improve your credit by diversifying your credit mix, showing that you can make on-time monthly payments, and reduce your total debt .*
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Home Equity Consolidating Dos And Donts
Before you pull cash out of your home, or tap a home equity line of credit, consider the following dos and don’ts.
- Do list all your car and personal loan balances and interest rates.
- Do contact your current lender and several other lenders for rate quotes.
- Do visit a tax Web site to determine whether you qualify for a home equity loan interest tax deduction. If you must pay the alternative minimum tax , then you’re not eligible for this deduction.
- Do study your budget to make sure you can comfortably afford the closing costs and monthly payments of the home equity loan.
- Do compare several loan offers to ensure you receive the best rate and the most reasonable fees from a lender with a good reputation.
- Don’t agree to a loan from the first lender who makes an offer.
- Don’t borrow more than you need.
- Don’t borrow more than 80% of the value of your home between your first mortgage and home equity loan or line of credit. For example, if your home is worth $140,000 and you still owe $100,000 on the first mortgage, you can safely borrow a maximum of $28,000, assuming you can affordably make the payments for both the first mortgage and home equity loan.
- Don’t continue to create new debt once your old debt is consolidated into the home equity loan.
- Don’t treat your house like a cash register.
