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Debt Consolidation?

I am looking to buy a home within the next 180 days.  I have about $22,000 consumer debt and annual family income of $72,000.  I have been offered a $9,000 loan at 8%. I could lower the interest rate on about 1/2 my debt, but I would still owe the same amount.  Good idea or not?
  • September 28 2013 - US
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Answers (3)

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Thanks...Both very useful answers. Good information
  • October 03 2013
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Bad idea, sort of. Here's why and why not. 

The lower the interest rate, the faster you can pay off the debt. Another way to cut debt is by following Dave Ramsey's snowball effect of paying off debt.

The new loan, assuming it's a fixed rate loan (not a credit card), will drop your score 7 points for a new account. You'll lose another 7 points because, upon opening the account, the balance will meet the limit. Another 4 points will be lost because of the type of account (fixed vs revolving). And yet another 4 points may be lost if the company giving you the loan ends in the word "financial" (finance companies are for people with bad credit and is reflected against the scores). You may be okay losing around 22 points since you're not buying for 6 more months. 

Here's another issue unless you don't do what others do: If you pay down the consumer debt, DO NOT close the accounts that you paid off. Doing so reduces your points because you are closing aged accounts. This will cause you to only have new accounts and that's bad towards the scores. 

What you can also do is take the $9,000 and only use $6500 of it. The day after you get the money, pay $2500 of it back to the bank to drop the balance away from the credit limit. If possible, ask a relative not on the mortgage loan to get the loan so that payment won't go against your income for qualifying purposes. 
  • October 01 2013
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While consumer debt is important, it is only part of the picture.  Certainly lowering your total monthly obligations will help you qualify--if this loan actually will do that.  Sometimes cash flow is more important than interest rate. Without knowing more about your financial situation and all of the terms of this loan, it's really impossible to evaluate. 
  • September 30 2013
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