If you struggle to pay bills on time (or at all) because you have multiple balances and loans to keep up with, debt consolidation can seem like a good solution to your problems. Consolidating helps many people simplify payments and make debt more manageable.
But if you rent, you might want to think twice before you consolidate debt. Here are a few reasons why.
How does debt consolidation work?
If you hold sizable debt on a variety of credit card accounts or loans, chances are, you find tracking all the different due dates and payments you need to make each month a struggle. You also need to ensure there’s enough money in your checking account at these various times so you don’t cause an overdraft. Add this on top of keeping up with your rent payment too, and you may feel as if you’re spinning plates each month when everything comes due.
When you consolidate your debt, you take out a brand-new loan from a single lender. The money borrowed totals the sum of your current outstanding debt, and the new lender pays off the multiple debts in your name all at once. This allows you to owe one lender instead of many, which can make for a simpler debt situation to manage.
It may sound great, but debt consolidation isn’t for everyone — especially if you rent your home. Here’s why.
When you consolidate debt, it can affect your credit score
Are you renting right now because you’re saving up for a down payment on a home in the near future? Will you need to finance a car purchase soon? Have you thought about going back to school and might need student loans to make that happen?
Applying for a debt consolidation loan will cause a hard inquiry to appear on your credit, which takes two years to fall off your report. And these inquiries can ding your credit score — which is the last thing you want to do when looking for a potential loan.
Your credit score will help determine what interest rate a financial institution offers you, and a lower rate can mean saving thousands of dollars over the lifetime of something like a mortgage.
And a lowered credit score can affect you even if you’re looking to rent elsewhere (as opposed to securing a home loan and buying a new place). Landlords can conduct credit checks before renting to potential tenants to see if they’re capable of making rent payments on time (and many do). Having hard inquiries on your credit, or having a poor credit score in general, might keep you out of the running if the market is competitive and there are numerous applicants for a unit.
Debt consolidation can be costly
While debt consolidation seems like a good fix for managing payments, it won’t help if you can’t afford to make payments at all. If you miss a payment on your consolidated loan, you’ll incur late fees and your interest rate may increase. The consequences of falling behind on a debt consolidation loan are the same as with any loan.
As a renter, your living situation may not be as stable as you think. Some landlords and rental agencies aren’t very forgiving if you miss a rent payment or if you pay late. You don’t want to struggle to afford rent because you can’t make payments on your consolidated loan.
Consolidating debt isn’t a fix for poor financial habits
If you’re looking to consolidate debt from credit cards, you need to consider the underlying problem behind your spending issues first. Consolidating your loans and credit card balances may make it easier to keep track of your payments — but will it actually help you get out of debt?
Consolidating won’t help if you continue to practice the poor financial habits that led to debt in the first place.
This is especially true for renters, who typically enjoy more financial flexibility than homeowners, since they’re not financially responsible for anything that may go wrong with their residence. (When the HVAC unit stops working, the plumbing system gets backed up, or an appliance dies, the landlord takes care of it for you.)
Renters’ insurance also tends to be cheaper than homeowners’ insurance, and renters don’t need to worry about extra costs associated with homeownership such as property taxes or lawn maintenance.
This flexibility can lead to the incorrect assumption that if you rent, you don’t need an emergency fund or as strict a spending plan as you would if you owned.
But everyone can benefit from tracking their spending, having emergency savings, or keeping to a budget. Renters need to take their finances just as seriously as homeowners. Before turning to consolidation, make sure you can manage your money wisely and change bad habits (such as frequently eating out or overspending on clothing and entertainment) that lead to accruing debt.
Alternatives to debt consolidation for renters
Take advantage of having more financial flexibility as a renter and establish a budget and an emergency fund for rough times. Develop good financial habits so you’re not getting into more debt. Figure out what your spending triggers are, and avoid them.
As a renter, you can also relocate to a cheaper place when your lease is up or split the rent with roommates to make your living situation more affordable. Do what it takes to get your financial house in order so you’re not struggling to make payments on your debts.
Bottom line? Declutter your finances before you decide to consolidate debt. That way, you can approach repayment with a clear plan of attack and a firm understanding of how consolidation can affect your goals and your overall financial health.