Debt consolidation for seniors

Sometimes you can get to a point where debt feels overwhelming. It’s great that you’re boning up on the options and learning what to do next, because a rearrangement of your finances could bring some relief. Even on a fixed income, there’s always tips and tricks to better manage what you’ve got. 

Debt consolidation is when you use a new loan to pay off multiple existing debts, potentially with a lower interest rate This could make monthly payments simpler and more affordable, easing your budget—and your stress.

Like most issues in life, there’s pros and cons, especially when you're a senior on a fixed income. Let's explore what seniors need to know about debt consolidation.

Is debt consolidation a good idea for seniors?

Yes, under the right circumstances, debt consolidation could be a good strategy to make your debt easier to manage at any age. Here’s how it works. 

Debt consolidation combines multiple debts into a single loan. With a fixed-rate loan, you could have a set monthly payment so you know exactly what you owe every month. This could help you manage your budget with more confidence.

This strategy could be an excellent choice for seniors with a stable income. It can be especially beneficial if you can secure a consolidation loan with a lower interest rate than you're paying on your current debts. The goal is to save money, simplify your financial life, and see some light at the end of the tunnel. 

Key considerations for seniors

As with any financial decision, it pays to look at debt consolidation from all angles. That means considering all the potential outcomes.

Impact on retirement income

A consolidation loan could have both a positive and a negative impact on your retirement income. Once you know which one outweighs the other, you'll have a good idea of what you want to do next. 

Positive: 

• Potential for increased savings

• Simplified finances

Negative:

• A longer repayment term could mean paying more interest 

• Fees and expenses could cut into your potential savings 

Risks of using home equity

Using a home equity loan to consolidate debt could be a smart financial decision, but it's not without risks. With any home equity loan, your home acts as collateral, meaning your lender could foreclose on and sell your home to recoup their losses if you stop making payments. 

Before considering a home equity loan to consolidate debt, it's critical to make sure your monthly budget can handle the payment. 

Best debt consolidation options for seniors

Once you've avoided the scam artists and hustlers, you could have several excellent debt consolidation options from which to choose, including the following.

Home equity loans and HELOCs

The amount of equity in your home is its current value minus your outstanding mortgage balance. For example, if your home is worth $400,000 and your loan balance is $300,000, you have $100,000 in equity.

$400,000 - $300,000 = $100,000

Seniors who have owned their home for a while likely have a lot of equity built up. This could help you qualify for a lower-interest-rate home equity loan or home equity line of credit (HELOC) you can use for debt consolidation.

Take your time weighing the pros and cons of a lower rate against the risk of using your property as collateral to back up the loan. 

If you decide that a home equity loan is right for you, look for a lender with a fixed interest rate and reasonable fees. If the home equity loan you take out has a variable interest rate, not knowing when your interest rate (and payments) might increase could play havoc with your monthly budget. 

Personal loans

A personal loan could also be a good option for consolidating debt. Personal loans are typically unsecured loans, so the rate and terms you're offered will depend heavily on your credit history. The average personal loan has a lower interest rate than most credit cards.

Personal loans are also installment loans, meaning you have the same payment each month. The fixed rate of a personal loan could help make budgeting more predictable while on a fixed income. Checking your monthly budget is still important to ensure you can easily afford the monthly payment. 

Alternatives to consolidation for seniors

Consolidation isn't the right answer for everyone. You could have a variety of other strategies to employ to get rid of your debt.

Debt relief

Debt relief refers to various programs or strategies designed to help you reduce or eliminate debt. If you're struggling to meet your debt obligations, debt relief could help you regain control of your personal finances. Here are some of the most common forms of debt relief:

• Debt settlement. Debt settlement is when you negotiate with your creditors to get rid of your debt for less than you owe. This could involve a lump-sum payment or a payment plan. You can DIY debt settlement or hire a professional debt settlement company to work on your behalf.

• Bankruptcy. Bankruptcy is a legal process that could allow you to restructure or eliminate certain eligible debts. Chapter 7 bankruptcy could eliminate most or all of your unsecured debt if you qualify. Chapter 13 bankruptcy could restructure your debt to help you avoid foreclosure.

• Debt management plan (DMP). A DMP is a structured program for paying off debt offered by credit counseling agencies. You work with a credit counselor who could try to get fees waived, interest rates cut, or set a better repayment term. Then, you make one monthly payment to the agency, which pays your creditors directly. DMPs typically take three to five years.

Reduce living expenses and/or find money

If you're dealing with debt that you desperately want to rid yourself of, consider trimming your budget, at least until those debts are paid off. For example, if you're paying for a rarely used gym membership or have more streaming cable channels than you can possibly watch, consider giving them the heave-ho until your debt level drops. 

You may even want to consider selling your home or parting with belongings. Take time to decide whether you really need all the stuff you've accumulated or the amount of space you're living in. 

You may choose to sell your home or to stay put—that decision is 100% up to you. But use this opportunity to sell the things you no longer need or use, and use those extra dollars to pay off debt and add some flexibility to your otherwise fixed budget. 

How to avoid debt consolidation scams

Most good things in life have associated scams and frauds. Here are steps you can take to avoid debt consolidation scams:

• Verify, verify, verify. Research agencies and don't sign on to work with anyone until you've verified they're legitimate. 

• Don't pay for nothing. Watch out for upfront fees—this is often a red flag, and it could even be illegal in some cases. Avoid companies that try to collect fees before they've even done anything to help you.

• You make the first contact. Don't fall for it if you get unsolicited phone calls or messages offering to make your debt disappear or a too-good-to-be-true loan. Legitimate lenders aren't likely to call you out of the blue.

• Learn your options. If someone claims to have access to special government programs or tells you they know about special loopholes that will solve your debt, they’re not telling the truth. There are no government programs that get rid of your credit card debt. Research your options so you know when you're being fed lies.

• Crunch the numbers. Some predatory companies may offer relief—but the fees end up costing you more than you save. Look at the fees closely and crunch the numbers yourself to be sure you're really coming out ahead.

• Read the fine print. Ask questions about anything you don't understand. If the company won't answer your questions, tells you not to worry about it, or otherwise blows off your concerns, move on. 

What's next

If your goal is to consolidate existing debt, speak with a trusted advisor—someone who will give you the honest scoop and help you decide which consolidation method is best for you.