Can You Reconsolidate Debt?
5 things I learned on the road to approval for reconsolidation.
I’m a huge fan of debt consolidation, and not just because I happen to work for a company that helps people consolidate debt. A few years ago, after I started working for Consolidated Credit and learned about debt consolidation, I decided to consolidate on my own with a personal loan. This week, I just set up a new loan to reconsolidate and, once again, it’s going to cut my monthly debt payments in half.
Can reconsolidation work for you, too? Here’s what I learned along the way as I worked to get approval, so you can have an easier road to finding debt relief.
#1: Using a loan comparison site will flood your inbox
The first time I consolidated, I went directly to my credit union to get the consolidation loan. Credit unions tend to offer better interest rates to members than other lenders. Still, I know better than to just take the first offer I find. I was in a rush the first time I consolidated because I urgently needed to lower my payments. This time, I made sure to give myself time to shop around.
So, I used an online loan comparison engine to shop around easily. Personally, I love Bankrate, so I used their consolidation loan comparison tool. Within minutes, I had six lenders with offers in my inbox and one lender called me back within five minutes. It was an easy way to get different quotes without needing to visit a bunch of different websites.
#2: Know the difference between a quote and an application
The comparison tool gave me quotes from lenders that participate in Bankrate’s comparison program, but it didn’t give me everything. So, I went back to my credit union to check what they would offer. This is where I made my first mistake.
I wanted a quote, but I ended up filling out their entire loan application. Instead of submitting a request for a quote, I requested the loan itself. That’s bad, because they ran a credit check.
Too many credit checks within a six-month period is bad for your credit. When you shop around for mortgages and auto loans, they group checks around the same time together, so you can compare exact rates without ruining your credit. But that doesn’t happen on personal loans. Every application is an individual credit check.
This means you need to select your consolidation loan based on the quotes only. Otherwise, you can decrease your score before you get the loan you really want to apply for.
#3: Check lending standards before you apply
Another mistake that I made was not checking with each lender about their lending requirements before I applied. One of the quotes I received from the comparison tool was lower than the rate I received from my credit union. So, I applied with them.
The problem was that they’d given me the quote based on a general credit assessment. Once they ran my credit, I didn’t qualify for the loan. Their standards required a 720 FICO score to qualify. My credit was 719… literally one point off. They rejected me.
I asked why they gave me a quote if I didn’t qualify and the rep told me it was because I seemed like a good candidate. However, they’re a new lender, so their lending requirements are stricter than other lenders. Had I known that in advance, I wouldn’t have applied because I knew my FICO wouldn’t meet their standards.
Mae sure to check:
- which credit score the lender uses
- what’s the minimum score required for approvals
- which credit report do they review
- what’s the maximum term they will lend for
So, do your due diligence and speak directly with a lender before you complete their online loan application. If possible, make sure that the score and report that they check are where they need to be before you apply. You can check your credit reports for free through annualcreditreport.com. You can use services like Credit Karma to check your score or go directly to FICO. Make sure the lender will lend for the term that you want. Know what credit score they require and how much they’re willing to negotiate. This brings us to…
#4: Recognize how much room there is to negotiate
So once the other lender rejected me, I went back to my credit union. They’d already run my credit and pre-approved me for a loan. But I didn’t like the terms that they offered. Namely, they were asking that my husband and I close the two credit card accounts that they were paying off.
I didn’t want to close those accounts because it would have ruined both of our credit scores. Here’s why:
- Credit utilization is the second biggest factor used in credit score calculations
- It compares credit currently in use to your total available credit limit
- If we closed our largest-limit credit cards, you instantly hurt your utilization ratio, which can significantly decrease your score
- Those accounts were also our oldest accounts and “credit age” is another factor used in credit scoring
That’s the main reason that I went to the other lender, besides that the other lender offered a term of 60 months where my credit union stopped at 48. Since we were trying to get the lowest payments possible, we wanted the longer term.
But after the other lender rejected us, we went back to the credit union. I explained my reasoning for not wanting to close the accounts. And they eventually waived that requirement so we could proceed with the loan.
#5: Make sure to assess the cost before you sign the final paperwork
Once you get the initial approval during the underwriting process, you’ll move into closing. At that point, the lender should provide a Truth in Lending Disclosure. This tells you:
- What the final rate is that you qualify to receive
- What the monthly payment is
- How much the loan will cost, in total
These are all important factors to review. You want to make sure this loan provides the benefits you need before you complete the docu-sign. You want to:
- Make sure the rate is not notably higher than your original debt consolidation loan
- Check that the loan provides a monthly payment you can afford
- Make sure that the total cost is in line with your expectations.
In my case, the interest rate on the new loan was only 0.5% higher than the rate on my original consolidation loan. That means total cost will be slightly higher once all the debt is paid, but not significantly so. And the biggest benefit, once we reconsolidate the debt our total monthly debt payments are cut in half, which is what we needed.
Monthly payments versus total cost of repayment
You may be asking yourself why we chose to reconsolidate debt at a higher interest rate, even if it wasn’t much higher. The answer is all about monthly payment requirements. My husband went back to school last year, so our income fell. Until he graduates in 23 months, we need to cut back expenses in our budget so we don’t need to go crazy picking up side jobs.
In order to fix our monthly debt payments, we need to reconsolidate the loan. The new loan increased total cost, but dramatically decreased our monthly obligations. That was a tradeoff we were willing to make, especially because we have no intention of letting the consolidation loan run out its full term. Once my husband gets a job, we’ll pay off the remaining balance faster. Since the consolidation has no early repayment penalties, we could plan ahead to do just that.