Due to financial hardship, not only are many of our older adults fifty and over not living a carefree life, but many are up to their ears in debt. Ten years ago or so, job layoffs became the norm. Those around the age of fifty and over were, and still are, targeted for early retirement. If they accept(ed) it, they would receive a portion of what they would have received had they worked until full retirement age, along with continued healthcare/dental benefits.
Some took early retirement and went back to work as contractors for the same company from which they took the early retirement. Others went to work for other companies, and still others just plain retired believing they would live out their lives on their investments. Much to the latter’s chagrin; the stock market hit an all time low around June of last year. No investment was sacred, and many nest eggs collapsed. The anticipated retirement fund no longer held its value.
Along the way, however, many began to accrue debt, buying new homes, new electronic toys and new recreation items. Now, their stocks and mutual funds are almost worthless, they are in major debt and are considering their options as to how to navigate their way out of it.
What is Debt Consolidation?
You probably want some clarification about what debt consolidation is before you even consider it. Debt consolidation means just what it says, consolidating debt. You take out one loan to pay off the others. There are a variety of methods you can use to consolidate your debt. You’ll find a few below.
Video: The Pros & Cons of Debt Consolidation
Debt Consolidation Companies
Debt consolidation companies, or credit counseling companies, act as your representative in negotiating with your creditors to arrive at a payment that is suitable for you. They can often negotiate the total amount of your debt down by fifty percent or more and payments that are very affordable. Keep in mind, most debt consolidation companies build in a fee for their service, which is usually around ten percent. They pass this payment along to the creditor, and some even directly debit your checking account, charging the creditor ten to fifteen percent of your total debt to do it. Be careful to research their reputations to ensure that you get one who will work hard for you.
Home Equity Loan/Second Mortgage
One of the most popular ways to consolidate debt is to take out a second mortgage on your home, often called a home equity loan. You pay off all existing debt with the second mortgage, and pay it all back in only one small payment a month. Interest rates are relatively low, and you can stretch out your payments over fifteen months. You must be careful when considering a company to use for a second mortgage loan. Some in the industry are known for bait-and-switch tactics, which means they quote you a very low rate when you initially call, but the rate increases by the time you actually close on the loan. By then, you may be desperate for the loan, and most people go ahead and sign, anyway. You can check with the Federal Banking Commission for any companies you suspect may be unscrupulous, or do a search online to see if you find any negative information about them.
If you call several companies who check your credit report within less than ten days, your credit report should not be negatively impacted. According to myFiCO.com, multiple inquiries into your credit report within a short amount of time should not diminish your credit rating.
Balance Transfer
You’ve probably seen the advertisements touting the transfer of all your credits card balances into a new interest free credit card. It sounds great at first blush, because you can save tons on interest; however, at some point, interest will begin to accrue on your new card balance. You may even want to move from one interest free card to another, but, eventually, your credit rating is going to be negatively impacted with all the new account activity. Even if you make sure the closed credit card(s) is reported to the credit reporting agencies as being closed by you, the short time that payments have been made on your current credit card does not look good on your credit report.
Refinance
You may also want to consider refinancing your home. Interest rates have dropped significantly in the last few years, and many have found they can save loads on refinancing their homes. You apply for a loan based on your home’s current value, assuming its value has increased over time. Using this approach, you may even come out with more money to do that remodeling you’ve been putting off or take that vacation you thought you couldn’t afford. Be careful, though, with these loans, too. You can also run into the bait-and-switch scammers. Do your homework in researching these companies, and you should be able to find one that is very reputable.
Reverse Mortgage
Since seniors are the focus of this financial treatise, it should be noted that many seniors are using a reverse mortgage as a means to consolidate or pay off debt. A reverse mortgage is available for seniors whereby the home equity in the property is released as a lump sum or over multiple payments. The obligation to repay the loan is delayed until the home is sold, the owner dies or the owner moves – e.g., into long-term care.
Only seniors age 62 and over are eligible for a reverse mortgage. You are required to submit to third party financial counseling at any HUD approved counseling source prior to being approved for a reverse mortgage. This is a government regulated safeguard to ensure that you understand what a reverse mortgage is and how to get one.
Video: Common Misconceptions about Reverse Mortgages
What Does AARP Recommend?
AARP is the right of passage for senior-hood, and AARP provides tools to determine if debt consolidation is right for you. To start with, they provide a debt consolidation calculator that provides you results at a glance as to whether it will be beneficial for you to consider consolidating your debt. You can access the calculator on their website.
Although, AARP does not give financial direction regarding debt consolidation, the website discusses predatory lending, provides a forum to ask questions about debt consolidation and enables seniors to file for social security online.
Is Debt Consolidation Right for You?
Only you can determine if debt consolidation is right for you. You’ll just need to take all things into consideration. Don’t make any decision in haste. Discuss your options with friends and family before making a decision. It always helps to get the advice of others. You may even want to make an appointment with a financial consultant. Just make sure that the decision you make benefits you and yours in the long run.
With seniors in mind, here is a list of trusted websites to visit:
Some took early retirement and went back to work as contractors for the same company from which they took the early retirement. Others went to work for other companies, and still others just plain retired believing they would live out their lives on their investments. Much to the latter’s chagrin; the stock market hit an all time low around June of last year. No investment was sacred, and many nest eggs collapsed. The anticipated retirement fund no longer held its value.