Did you know debt consolidation is the number-one reason people take out personal loans? In this episode of Making it Count, Randy and Cristina continue the Money Taboos mini series with a deep dive into debt consolidation and refinancing. They’re joined by Monica Barboza, Member Experience Lead at Addition Financial Credit Union, to explore the differences between consolidation and refinancing, the benefits of both, and everything else you need to know to effectively manage debt.
Cristina asks Question 1: “Monica, we're going to start off easy. Just the words refinance and debt consolidation are confusing, so let's take ten steps back and just define what each of those are and how they are different.”
Monica responds: “Of course. Debt consolidation is actually one of the most common things that people do because it's going to help you combine your debts into just the one — like one payment, one personal loan or one credit card — versus refinancing will be starting a new loan with either a lower rate or lower payment or a shorter term.”
Cristina follows up: “So you’re saying if I have three different credit cards and they’re all different interest rates, how would I consolidate?”
Monica responds: “There are two ways to consolidate credit cards. You can do a personal loan or a credit card. Normally credit cards have an intro APR, which is like 0% or 1.99%. 0% is always the best option to go to. And then you transfer all those credit card balances into just one credit card with a 0% APR — and they have timeframes for the APR. So they will just tell you, ‘Okay, you have 12 months to pay off your debt.’ You can either pay it off or it will go to a regular credit card APR after that.”
“But then we have the personal loans as well, where you can have a fixed payment fixed rate for a fixed time, because remember, credit cards are adjustable rates. They go up and down. So personal loans are another good option, especially if you need cash because you can take cash out of personal loan, too. So you can pay off the credit cards and also take cash to do something else, maybe remodel your house, maybe start a new business, anything like that.”
“We also have the refinancing option. Refinancing sounds really hard, but it's not. It's actually a way to save money either by lowering the monthly payment, changing the rate for a lower rate, or cashing out money because you can cash out money out of your equity as well. And that money is what we're going to use to consolidate your debts.”
Cristina follows up: “Is a HELOC also a refi? What is that, how does it work?”
Monica: “HELOC means home equity line of credit. This is a line of credit that we take out of your equity on your house. So let's say that you have been paying off your house for the past 10 years. The house value went up and we want to use that equity to either remodel the house or consolidate your debts. You can do that, too.”
“The home equity line of credit normally depends on which institution you use. It's an adjustable rate as well, so we have to keep that in mind. Or we have some line of credits that are a fixed rate — it depends on which one you choose to go with. The rate can change, but both of them you can take money out to pay off debt or do remodels, whatever you want to do on your house.”
Randy asks Question 2: “In terms of the debt that you would consolidate versus refinance, can you decipher that a little bit? You talked about refinancing a house, but are there other things that you could refinance?”
Monica responds: “Yes, of course. You can refinance your auto loan, you can include your credit cards, your student loans, mortgage, auto loans, everything can be refinanced when it comes to a loan. And by refinance, it's not like we're going to just transfer one credit card to the other. No, we're going to use that money that we're taking out of the equity to pay off those credit cards, to pay off the student loans, to pay off our loans. You can also refinance an auto loan and just get a new loan at a lower rate, lower payment.”
Randy follows up: “I just got my car recently. How long do I have to wait to refinance? Is there usually a waiting period? I can't do it like the day after, right?”
Monica responds: “Actually, it's just depending on your dealer and the dealer that helps you with the car. They will let you know the time frame. Normally I will say no less than 30 days.”
Cristina asks Question 3: “Besides refinancing to fix your house or debt consolidation to consolidate your credit cards, what are some other common reasons why people consolidate their debt?”
Monica responds: “Debt consolidation is a good way to increase your credit score as well. When you transfer all the credit card balances into one, or when you pay off all your credit card balances with a personal loan, it will help your credit score because you're going from having three balances and three different credit cards to just one credit card with one balance.”
“Or you go from having three credit cards with the balance to just a personal loan and no balances on the credit cards. So that will help your credit score to go up. Personally, I did debt consolidation about two years ago. My credit score went up and I was able to buy my first house.”
“It helps you with your finances because instead of having three payments, you're going to have just one. It's hard to keep up with three payments. ‘Oh, I forgot to pay my credit card today. Oh my god, I'm going to get a late fee.’ Yeah, instead of that, you're just going to have one payment., one APR to pay for.
Randy asks Question 4: “What about refinancing? Can you walk us through an example of what that might look like for me, because I just got my car.”
Monica responds: “So what's the purpose behind refinancing? What are you looking for? Are you looking to lower your rate? Are you looking to lower your monthly payment? Are you looking to lower the terms of the loan? Most likely you’ll will say all of them. And I'm like, ‘Okay, I can’t do magic, but I can try to help you.’
“In order for us to take a look at refinancing, we can extend the terms, but by extending the terms, the payment will go down. But then you have to keep in mind that there are more payments, and that you have to do them in a longer term. For example, if you finance your car for seven years and then you want to refinance for lower payments, I can go ahead and extend your terms for eight years and then you're going to be making more payments. But lower payments.”
“We can also lower the rate. Let's say that rates went down and we want to take advantage of that. Let's refinance so we can get a lower rate — and always a lower rate is a lower payment for sure. There's also the other option where you just want the payments to go down. You have been making payments for two years in this auto loan, and you know that if you refinance and you extend the terms, your payment will go down. But you have to keep in mind that you're going to be making more payments to it in the longer term.”
Cristina asks Question 5: “You've given us all these amazing reasons why debt consolidation and refinance are great options to help us financially. Are there any downsides that we need to be worried about?”
Monica responds: “There's always the good and the bad when it comes to refinancing or debt consolidation. Of course, we have to pull credit to see if we can get you qualified for this type of loan, and that will lower your credit score. The other thing will be you have to pay fees. There are no loans without fees because people need to get paid for the loans.”
“Normally, your home equity line of credit, home equity loans, anything that has to do with a mortgage, there are closing costs involved and longer time frames because we have to do an appraisal. We need to find out if the value of the house is correct, how much you owe, and if you're refinancing, we have to pay off the loan to the lending company, and that takes a wire transfer. It's a lot going on.”
“Another thing will be losing your collateral. Let's say that we refinance for a higher rate, your payment is higher and you're not able to afford the payment. You can lose your car, you can lose your house. That's why we do applications we take a look at to see if you can pay it. Sometimes when we have a rough time, people are getting divorced or people just want to take people out of the loan, they are willing to pay higher rates or higher payments just to do that. And that is when it becomes hard.”
“And then if you do a mortgage — refinance on a mortgage — you can also reduce your equity. So let's say that the market goes down, the value of your house goes down. You can always be on the negative side as well.”
Randy asks Question 6: “It sounds like despite the potential risk, consolidating could still be a great way for someone to just regain control of their finances?”
Monica: “Yes, of course. Like we were saying earlier, instead of having three payments, you can have just one. If you're saving money on your car loan, for example, you can use that money to pay off another credit card. When you do the home equity line of credit, you can consolidate all the debts that you have and just have your mortgage payment and that's it.”
“When you refinance with a home equity line of credit or a home equity loan, the rates are always lower because we're using the house as collateral. The rates for houses are always lower than car loans or personal loans because a house is worth more than a car and the personal loan is unsecured itself. Personal loans always have a higher rate than car loans and houses. So if you consolidate everything into a home equity line of credit, of course the rate is going to be lower.”
Cristina asks Quick Question 1: “In your opinion, is it better to consolidate through a personal loan or a credit card?”
Andrew responds: “Credit cards are better if it's a short term period. Normally the 0% APR is like 12 months. Personal loans are better for longer term loans and higher amounts.”
Randy asks Quick Question 2: “What about businesses? Can they refinance their debt too?”
Monica responds: “Yes, of course. They can do that through corporate refinancing. The companies can replace and restructure their existing debts as well.”
Cristina asks Quick Question 3: “If you're really deep into debt, is consolidation still an option?
Monica responds: “Well, it depends on the circumstances. Sometimes bankruptcy will be a better option. It depends on how deep you are into debt. But we can always take a look at it and make a decision on it.”
Cristina asks Quick Question 4: “What's your favorite part about helping people consolidate or refinance?”
Monica responds: “Oh, I love that question. I've been through this myself, so I love when they call you back and they say, ‘Oh my God, my credit score went up. I was able to get a loan. I was able to do this.’ That's the best part. And also that you're freeing their finances.”
Cristina follows up: “Can you share a story of someone that you got to help — a great experience?”
Monica responds: “I remember I had a member who was too into debt because she got divorced. She was using her credit cards to pay for stuff. And she was like, ‘I need a loan to consolidate all my credit cards so I can have a better control of my finances. When it comes to the end of the month, I need some money to, you know, take my kids out,’ or something like that.
“We were able to refinance all her credit cards into a personal loan, and she was paying like $200 a month instead of $550. I remember those amounts because I was so happy to help her. She was so happy on the phone. She was like, ‘I'm able to take my kids out to the park,’ and stuff like that. She was so happy and I was super happy, too. It's amazing. This is the best part of working on financing — helping people achieve their goals.”
You can contact Monica Barboza at (407) 896-9411, extension 7091.
On this episode, Cristina and Randy shared a free Debt Consolidation Comparison Chart. With this resource, you can compare a cash-out refinance with a HELOC, explore the pros and cons, and choose the best option for you.