The idea of getting a debt consolidation loan can seem like a good one. You combine all those pesky bills from separate lenders into one bill, making only one automatic payment per month that may be smaller than the total of your current bills. It seems the perfect solution to debt problems.
It could be. However, you may want to take heed of some caveats from financial experts before jumping on the consolidation bandwagon. Here are some tips to help you determine if a consolidation loan is right for you.
First, remember that lenders expect to make money off of debt consolidation loans, so they would not be offered if there was no profit in it. That means you need to read the fine print and do the math to see if you are, in fact, getting a better deal. Consider your current payment rate and how long it would take to pay off your bills under those terms. The average consolidation loan is for 60 months, so you could be paying longer and wind up paying more, even with a lower interest rate.
There can be other options to a consolidation loan. Those who are deep in debt might want to call their current credit card companies to see if they will negotiate a reduction in the interest rate or the elimination of annual fees. Since it is less costly for lenders to keep current card holders than to compete for new ones, they want to hold on to low maintenance borrowers who pay on time. You may have problems in this effort, though, if you have a record of inconsistent payments.
Homeowners have an addition option. If you have gained a fair amount of equity in your home, you may want to investigate refinancing and then using the additional cash the equity allows you to borrow to pay off credit card bills. This has the benefit of switching the debt from the high interest credit cards to the much lower interest home loan rate. However, you again may be paying more in the long run unless you use the money the refinancing frees up each month to pay down the mortgage and boost your savings toward retirement or create an emergency savings account.
Whatever you decide, consider your own buying behavior. If you do pay off your current debt, will you continue to use credit cards as you have in the past, which is what got you into this situation in the first place?