Debt Consolidation

Should You Consolidate Debt During the Coronavirus Pandemic?

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The coronavirus pandemic has left tens of millions of Americans out of work, and the financial ramifications of staying at home has plenty of consumers worried about mounting bills and debt.

If you’re concerned about paying off a growing amount of debt, this may seem like a good time to think about consolidating debt with better financing terms. A recent rate cut by the Federal Reserve has pushed down interest rates for some of the most common tools for consolidating debt, like personal loans, balance transfer credit cards and home equity loans.

If you think debt consolidation might work for you, consider the benefits and drawbacks we’ve listed below, as well as potential alternatives.

Consolidating debt during the pandemic: What to consider

Alternatives to debt consolidation amid COVID-19 crisis

Consolidating debt during the pandemic: What to consider

Debt consolidation is a way to consolidate multiple debts (or even multiple types of debt) into one form of financing that offers better terms, like a fixed monthly payment or a lower interest rate.

One way to consolidate credit card debt is to use a balance transfer card, which for borrowers with good credit may offer an introductory 0% interest rate. You can also combine many types of debt (like credit card debt and student loan debt) with a debt consolidation loan, a type of personal loan and which often comes with a predictable, fixed monthly payment.

Your financial situation will determine whether debt consolidation is right for you. But it’s generally best to consolidate debt when interest rates are low, to help trim financing fees in the long run. Still, consider the following first:

Consolidating debt during the COVID-19 pandemic
Pros Cons
  • After a recent rate cut by the Federal Reserve, debt consolidation financing charges are down, especially for borrowers with good credit.
  • Consolidating debt can make it easier to keep track of payments, and with personal loans, secure a standard monthly payment.
  • Debt consolidation may cost you more than alternatives that let you defer or pare back on debt payments.
  • Borrowers with fair to poor credit are less likely to benefit from the recent rate cuts.

Interest rates are still low, making it a good time to refinance

The Federal Reserve slashed the federal funds interest rate to 0% on March 15, and financial institutions are already passing on lower interest rates to their customers. For personal loans, for example, lenders are still offering higher APRs than before the pandemic, but those rates have dropped substantially since mid-March, especially for borrowers who have a good FICO Score of at least 680, according to LendingTree data.

If you own a home and are trying to consolidate debt, this might also be a good time to consider a home equity loan or line of credit. If a home equity loan is your preference, it helps to know that while mortgage rates rose in May, they’re still low by historical standards.

“Consolidating debt to low interest rate vehicles in this environment is crucial,” said Sandra D. Adams, a certified financial planner based in Southfield, Mich. “We are advising many clients, if they own homes and are in a position to do so, to refinance mortgages [or] seek out home equity lines of credit at the extremely low rates available on these loans versus having outstanding credit card balances at ridiculously high rates.”

Not all borrowers will qualify for better rates when consolidating

When consolidating debt, it’s important to have decent credit, a steady income and a good debt-to-income ratio to qualify for competitive terms on new financing. If your score is below 670, for example, you’ll be considered a subprime borrower, and it might be difficult (if not impossible) to receive low interest rates on any debt consolidation option.

TIP: Due to the pandemic, you can now check your credit report weekly through the three major credit bureaus (Equifax, Experian and TransUnion) for free until April 2021.

Financial institutions are more lenient on current borrowers during hardship

Many financial institutions are now offering hardship assistance programs for borrowers who are struggling because of the pandemic. Before you consider debt consolidation, reach out to your creditors and lenders to see about options like forbearance, fee waivers and reduced payment plans. We’ll tell you more about these alternatives later.

If you’re struggling to pay bills due to the COVID-19 crisis, ask your lender or bank for leniency during this time. Visit this LendingTree coronavirus hub for resources on how to manage your money amid the outbreak.

You may need to take a closer look at your financial wellbeing

Borrowers who are struggling to keep up with their finances during the pandemic may want to speak to a professional advisor for guidance. Some borrowers may even qualify for free or reduced-cost credit counseling services through a nonprofit credit counseling agency. Nonprofit credit counselors are usually both certified and trained to consult on topics like consumer credit, budgeting and debt management.

TIP: Be careful when choosing a credit counseling agency. Don’t mistake debt settlement companies, which are for-profit entities, with a nonprofit credit counseling agency. Debt settlement companies typically charge a fee to settle your debt with debt collectors.

To find advice through an accredited nonprofit debt counselor, check with the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).

Alternatives to debt consolidation amid COVID-19 crisis

When you’re struggling to keep up with your bills, debt consolidation can be a useful financial tool. But as we said earlier, there are easier and potentially more affordable alternatives you should consider first. Those options might include refinancing your home or an existing personal loan, or asking lenders to forego or postpone debt payments. Read on for three alternatives to consider, as well as specifics on how to put them into action.

Get in touch with your lender or card issuer

You may qualify for one of the following programs through your creditor:

Hardship assistance programs
Forbearance This lets borrowers forego making debt payments for a few months, or possibly longer. The missed payments are often tacked on as a lump sum at the end of this period, spread out and paid through an installed payment plan, or tacked on at the end of the loan term. Your loan may continue to accrue interest.
Fee waivers Some financial institutions are waiving late fees, as well as fees on transactions like withdrawals from savings accounts and certificates of deposit. They’re also working with the credit bureaus to minimize negative reports on consumer credit records.
Payment plans Borrowers who can’t make a full monthly loan payment may qualify for a reduced payment plan or special terms on their financing.
Temporary minimum payment reductions Credit cardholders may qualify for a temporary reduction of their minimum payment by reaching out to the card issuer. Interest will continue to accrue, but the borrower won’t be charged a penalty.

Apply for unemployment and emergency aid

If you’re been severely affected by the pandemic, check to see which federal programs might be available to you. This includes unemployment assistance, which under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, American workers on unemployment are also eligible to collect an additional $600 per week on top of their regular benefits. The legislation also comes with benefits for gig workers and self-employed workers who normally wouldn’t qualify for unemployment benefits.

Consider visiting your local food bank or signing up for a Supplemental Nutrition Assistance Program (SNAP), commonly referred to as a food stamp program. They can help you chip away at debt by cutting back on grocery costs.

Prioritize which bills are most important to pay first

When you absolutely can’t pay your bills and debt consolidation isn’t an option, you should prioritize your bills based on which ones are most urgent to pay first. Generally, you’ll want to focus on secured debts — those backed by collateral like your home or your car — as well as court-ordered debts. Other bills are typically a lower priority. These include unsecured bills, like medical bills, student loan payments and your monthly credit card payments.

Higher priority bills Lower priority bills
  • Mortgage or rent
  • Auto loan payment
  • Court-ordered debts
  • Child support
  • Utilities
  • Medical debt
  • Credit cards
  • Student loans
  • Unsecured personal loans
  • Cable and other subscriptions

Still, don’t just stop paying off lower-priority bills. Reach out to your credit card issuer or lender to see if they also offer a hardship assistance program, and you might be able to save money on late fees and avoid being reported to the credit bureaus.  If consolidating debt is still your top concern, check this calculator from LendingTree to estimate which option might work best for you during this financially uncertain time.

 

Debt Consolidation Loans Using LendingTree