There are those who believe all lending is evil, I don’t buy it. As Solomon said in Ecclesiastes, “To every thing there is a season, and a time to every purpose under the heaven:” – Ecclesiastes 3:1
One of the only reasons you should borrow is to pay off debt, and even then you should only borrow when you meet some specific criteria. Here are those criteria…
When is Debt Consolidation okay?
I do not believe you should take on new debt, but if you have existing high interest debt then debt consolidation may be a viable option. I consolidated my high interest debt through Lending Club. This may or may not be a good idea for you… read on.
Most debt consolidation companies you see advertised are a scam, so BE CAREFUL. Never use a debt consolidation company that you have never heard of before, and try to use a company that someone you know and/or trust has had personal experience with.
No matter what you read, to come up with the best answer for your specific situation you MUST evaluate your options in relation to your circumstances.
Here are a few simple rules to follow when considering a debt consolidation loan:
- Have a game plan to repay the debt. If you do not have a debt reduction plan, do not consolidate debt. Period. If you do not have a plan chances are that you will not pay off the debt. Set realistic financial goals, develop a strategy to reach your goals, and start faithfully executing your plan through completion. Before consolidating my debt with Lending Club, I already had my debt reduction plan in place.
- Do not take on more debt. You have to be resolved to avoid additional debt at all costs, NO MATTER WHAT. Do not – I repeat – DO NOT take on more debt while you are repaying your existing debt – and I urge you to avoid all debt from here on out. Rather than taking on more debt, focus on eliminating what you have and saving money for the future. Before consolidating my debt with Lending Club, I committed to not take on any new debt.
- You have not paid off the debt until you actually pay off the debt. Remember… when you consolidate your debt you do not eliminate anything, you simply consolidated to fewer payments and shift the debt to a different lender. Do not fall victim to the common misconception that you paid anything off until you actually pay something off. When I consolidated with Lending Club, I felt good about my lower rate and overall long term savings, but I did not fool myself into thinking that I had somehow eliminated the debt itself.
- You can consolidate at a lower rate than all existing loans. If you have five high interest loans you are looking to consolidate, but only four have a lower rate than the rate being offered in consolidation, then only consolidate the four. Never consolidate a loan with a lower rate into a consolidation loan with a higher rate. When I consolidated my debt using Lending Club I had four loans and all four loans had higher existing interest rates than what was being offered in the consolidation loan itself; because of that, I moved forward and consolidated all four loans at the new lower rate.
- Always speed up debt repayment. Repaying debt is about commitment and hard work. Get a second job, reduce expenses, start a business on the side, stop spending more than you earn. Use all or any of these strategies to repay the debt ahead of schedule. Remember… the faster you reduce debt principal, the less you pay in interest, and the sooner you get out of debt!
If these five rules sound doable to you, then a debt consolidation loan may work for your particular situation.
I recommend Lending Club
I have personal experience consolidating my debt with Lending Club. I am in the process of following through on that debt consolidation plan and have paid off $4,500 of my $11,080 consolidation loan in just four short months. The repayment term on the loan is three years but I plan to have it paid off before July of 2010.
If you are responsible, have a plan, are committed to no future debt, understand debt consolidation does not mean debt elimination, want to check rates against your current debt rates, think you can speed up debt reduction, and have a decent credit score (660+)… then I suggest you check into consolidating your debt with Lending Club.
See if Lending Club is right for you
Myself along with several other well-respected personal finance bloggers have united to help fight debt and advise toward wise debt consolidation in what we have dubbed the Lending Club DebtBuster Challenge. This post is part of that challenge.
Other personal finance bloggers participating are: