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Reader Question: Debt Consolidation Loan?

A reader left a question in the comments (edited for length and spelling):

I just wanted to ask?

What Is A Debt Consolidation Loan? Is there anyone else here in a similar position as me with mountain of debt they are struggling to pay? I am seriously considering [a debt consolidation loan] to help my family.

Like a lot of people we started slipping into debt when I lost my job and couldn’t meet the monthly bills. I have heard a lot about debt consolidation loans but I don’t know what’s right or wrong?

Any feedback from anyone would be appreciated.

Deepest Thanks

Danni

Wikipedia defines debt consolidation as “taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.”

A debt consolidation loan can be a good idea if you need it, but there are several pitfalls to be aware of. Bankrate’s article “Debt consolidation: cure or continued credit problems?” does an excellent job of describing this pitfalls.

First of all, a debt consolidation loan is a lot like cold medicine – it treats the symptoms, but isn’t a cure. A lot of people who take out debt consolidation loans end up back in the same trouble again later. There has to be a shift in behavior and a commitment to stay out of debt in order to make a difference in the long run.

The Bankrate article offers some additional concerns and tips:

Before you sign on the dotted line, be sure that the costs of the new, bundled loan will truly be less than what you’re already paying various creditors. For many consolidation-loan candidates, their current credit woes mean they won’t get the lowest-available interest rate. Plus, when there is nothing to secure the loan (such as your home), expect the lender to bump up the rate.

Calculate interest and fees on all your existing accounts to determine the total of the payments you now make. Then compare those amounts with the consolidation loan numbers to make sure it truly is a better choice.

And, as with any product, shop around. The bank down the street may offer an attractive loan rate, but a check of your local credit union could turn up better terms, says Deborah McNaughton, author of “The Get Out of Debt Kit.”

Another problem with debt consolidation loans is that although they may offer lower annual interest rates, they usually come with a longer repayment term. This is how they why they offer a low monthly payment: because you’ll be paying on it for a very, very long time. And a long repayment period means paying more interest overall.

In general, working to manage your debt yourself before turning to another loan is usually better. Strategies like the Debt Snowball can help you plan out your own debt repayment plan – if you can manage to pay off your debts without the help of another loan, you’ll be better off in the long run.

5 responses to “Reader Question: Debt Consolidation Loan?”

  1. ADY

    Am after a loan but am very sceptical these days, there are a lot of sharks out there, can you point me to an article that explains all the different types of loans please? Thank you :D

  2. karnpatel @ Debt Consolidation Advice

    Debt consolidation works well but it would be smarter to consider looking for professional help when considering a where to get a loan as you might make some serious mistakes.

  3. Annie @ Credit Dispute

    If you are considering a debt consolidation loan and are having problems with serious debt, do consider an expert’s debt advice. It’s always important if you begin to have debt problems to contact an expert as early as possible. An expert can put your debt worries at ease and help you find a solution to your debt problems quickly.

  4. Ann

    Debt consolidation is the best solution if you are fully into credit card debt. It would help you only if you are serious enough and restrict usage of credit cards.

  5. Keith

    I think we should take every opportunity to get the message out that borrowing even more money is rarely the best approach to getting out of debt. It is well known and relatively easy, but most people end up paying far more than they otherwise would.