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One of my favorite personal finance blogs is Free Money Finance.

This week FMF shared one reader’s money question and I thought it would be interesting to share with you guys.

You’ve had some great thoughts and solutions in the past, so I’d love to get your take with this.

Is Consolidating Debts a Smart Option?

Here’s the situation:

I am looking to consolidate my credit card debt into one personal loan. Unfortunately my credit is not perfect.

Right now my credit score is 630 and I have loads of credit card dept.  I’ve estimate I would need a personal loan of at least $15,000.  Since I don’t own a home this loan would have to be unsecured.

I currently have a car loan which I pay monthly and student loans that I have been paying on for 4 years and I have never missed a payment.  I rent and pay utilities on time.

I have a full time job where I bring in about $50,000 a year.  So would joining a credit union boost my chances for getting a sizable personal loan as opposed to going through my current bank (PNC)?

I’m curious to see what their current rates are for their debts. I didn’t see it in the comments either, so I’ll estimate 18.9% based on Bankrate’s report.

My Two Cents on Consolidating and Paying Off Debt

Getting an unsecured loan for $15,000 seems a bit of a stretch to ask from a financial institution, whether it’s a bank or credit union.

My personal experience has been that credit unions have better loan rates, but they still have to run the numbers before giving out a loan.

I would suggest being aggressive and paying off one of the credit card debts on her own with her current income.

She can then decide if she wants to keep her debt reduction plan or she can shop around for a loan. An added bonus with paying down the debt is that she can may get a better loan rate if her credit score improves.

Here’s my suggestion for handling it all:

  • Run the numbers. Grab or create  a debt reduction spreadsheet and list all your creditors, the interest rates, and the total amount you owe.
  • Keep cards away. If she hasn’t already, she should not dig any further into debt. some people prefer shredding their cards, others freeze them, but I just took my cards out of my wallet.
  • Find money for your debt reduction plan. Eliminating and cutting back on unnecessary expenses that don’t really matter to you can be be redirected instead reducing debt. Use either a debt snowflake, snowball, or even an avalanche to work your way to being debt free.
  • Automate payments. You can bypass a lot of mistakes and relapses if you automate your credit card payments with online bill pay. Most banks and credit unions offer this feature for free.

Don’t get too hung up on the method. Highest interest rate method is the financially sound decision, but paying off the lowest debt amount first  is the psychologically empowering decision. Do what works for you.

I would suggest Prosper or Lending Club as options if she gets denied by the credit union. However these sites are businesses and don’t just give out loans – she’d still have to fill out an application and share her finances.

Thoughts on Consolidating Loans

I know many of you have some wonderful thoughts on reducing debt so I’d like to hear your explanations.

Should she consolidate her debts or just go ahead and tackle them? Do you think she’ll get a $15,000 unsecured loan easily from a credit union?

 

About Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

11 comments add your comment

  1. In this credit environment, I think it would be difficult to get a personal loan like that. But it doesn’t hurt to discuss with a banker without filling out an application although filling out an application and triggering a credit check could hurt the credit score even more. Your suggestion to focus on paying off some debt is a good one. Give it 6 months to a year of diligence and the loan needs may be less and the credit score improved from the decreased debt:credit ratio.

    • It does look like her income may be able to be enough to start paying down her debt aggressively. I do hope she’ll be able to tackle this.

  2. For sure, a Credit Union is going to have better rates. But, are they going to be more likely to lend out a secured loan of 15k? No. They have the same risk assessment that any bank has. If the reader is dead set on getting a consolidation loan, maybe they could try their luck at a peer lending site like lendingclub.com.

    If they aren’t all about getting a loan, I’d suggest that they do what they can to cut costs, stop using the cards, and begin an aggressive paydown. Sometimes, you’ve just got to rip the band-aid off. It’s quicker, and hurts for far less time.

    • I agree BB! I’m always a bit skeptical when people just assume credit unions will be more likely to give out loans. They are still a financial institution – you still have to have some reason that they should loan to you.

  3. That’s some great advice, and I think the most important thing is to make sure that the reader doesnt charge the cards right back up again.

  4. I don’t have any personal experience in consolidating debts but a friend did this when his credit card debt was starting to spiral out of control and it seemed to help him…

  5. I’m guessing she won’t be approved based on her credit score. I think your plan sounds better; she needs to figure out her budget and apply any extra money she can spare towards paying off that credit card debt.

  6. I don’t think a credit union is likely to give out unsecured loans this day and age, but it certainly doesn’t hurt to ask. The worst that can happen is a “no.”

    I agree 100% with creating a debt reduction plan sooner rather than later. It will seem daunting at first, but whittling away little by little is by far the best strategy.