Is a Debt Consolidation Loan Good?
Q: I have several debts that I am having trouble paying. Is a settlement with a debt consolidation loan a good idea?
A: The allure of the debt consolidation loan is that you can lump all your debts together and have a lower monthly payment. This may be true, but it is still a bad idea for the following reasons:
1.Settlement Is a False Sense of Security
You get a false sense of accomplishment that you did something about your debt. You didn’t! You still have the same debt; you simply moved it. A debt consolidation loan doesn’t fix the problem, it just masks it.
2.You Don’t Save Interest
You are told that debt consolidation loan will save you interest. This is not always the case. Why? Because lower rate debts are often consolidated with the higher rate debts.
3. You Just Stretched Out the Problem
Don't Stretch Out The Problem
If your monthly payments are lower as a result of the loan, you have probably agreed to stretch the debt out over a longer period of time. BAD IDEA! Your goal is to get out of debt, not prolong it.
4. Change The Behavior
You have dealt with the symptom, not the problem. The symptom is your debt; the problem is that you are not good at handling money. 78% of people who take out debt consolidation loans build up new debt (usually credit card debt) and end up much worse than when they started. You need to ask the person in the mirror why he is in this mess.
5. Best Plan is Debt Snowball, Not Debt Consolidation.
The best plan is to use the debt snowball, attacking your smallest debt while making minimum payments on all other debts. Once that first one is paid off, roll the payment amount, along with the minimum payment, into your next smallest debt. You will gain momentum as you see these debts disappear and you will actually be accomplishing something: paying off debt! Imagine for one minute what it would be like to have no debt whatsoever. You will have something most “normal” people in the USA don’t have: MONEY!
This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
Securities offered through LPL Financial, Member FINRA/SIPC
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Perhaps a post on how to do a debt consolidation well?
Such as: Only consolidate debt at a lower interest rate than each piece of debt is at currently. Ex: If you have 3 debts, 9% 15% and 19%, and you can consolidate at 12%, don’t include the 9% debt in the consolidation.
Continue to pay the same amount you were before, or even pay more.
As per my personal advice one should gather whole information about the debt consolidation. Have to analyze positives and negatives and then have to take decision.Nice Post.
There are many credit counseling and debt consolidation firms out there. Some are better than others. It is important that you do your homework before calling these firms so you know what to ask. If you have access to a trusted financial advisor or Attorney, talk to them first.
I have to say I agree – why pay for something you can do yourself much more effectively and without the added cost or potential mark against your credit? It just doesn’t pan out.
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The only advantage to a debt consolidation loan is you are able to see the extent of the debts you accumulated in one place, but then again that can be a bad thing. With debt consolidation loans the interest rate cannot be helpful as the interest rate on a large loan means that you are paying more rather than having the smaller payments with ht not so bad rates.
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