Reviewing A Debt Consolidation Loan

debt consolidation reviews

You may be balancing a few credit card payments along with a few outstanding bills and you may be thinking that a debt consolidation loan would be a sure way to organize your finances and make debt repayment easier.  On the up-side, a debt consolidation loan will make your life simpler; you will have only one monthly payment, not several. However, you need to consider very carefully whether or not a consolidation loan makes any sense for you. Here are 7 tips you should consider, both good and bad, when reviewing any debt consolidation loan with your bank or other financial institution.

Debt consolidation loans are a good idea if:

  1. The new consolidation loan has a lower interest rate (including any balance transfer fees) than your original loans. What rate you are able to negotiate will depend on what your credit score is and whether or not you have collateral like some equity in your home. There are debt consolidation lenders that focus on individuals with bad credit, however, these options are often very expensive and may not be your best solution.
  2. After you run the numbers you are sure you will pay less in total interest costs in the long run. If you extend the length of your loan your payment may be lower but your total interest cost will be higher. Ask for a loan amortization schedule so you know exactly how many payments you will be making and how much interest you will pay over the entire life of the loan. Many financial institutions make their loans appear more attractive to you by promoting a low monthly payment. However, if this means extending the term or length of the loan from 5 years to 8 in order to achieve that low monthly payment then you are going to remain in debt much longer and you are going to pay more interest over the life of the loan.
  3. Your monthly payment will be manageable so you will be able to make your monthly payments in full each and every month for the life of the loan. Defaulting on a debt consolidation loan will cause further financial problems as you will have used up most of your credit capacity just consolidating old debt.
  4. You are able to roll all of your problem debt into the new debt consolidation loan or you have a credible plan to deal with all of your debts. Don’t leave debts on the table or enter into a consolidation loan just to postpone the real problem: the fact that you have too much debt. If your debt is too high to consolidate, consider your other consolidation options first.

Debt consolidation loans are a bad idea when:

  1. You convert unsecured debt into secured debt. Debt consolidation lenders often ask for collateral (such as your house or a car) to support your new loan. If you don’t make your payments under your new consolidation loan you could risk losing your home.
  2. You take longer to pay off your debt. As mentioned earlier, it may not be a good idea to get a debt consolidation loan that extends the term longer than you would have been able to pay off your original debt. Do you really want to take longer to pay off debt?
  3. You continue to use your original credit cards. If you don’t change your spending habits you can quickly build up more debt again, before you even pay off your consolidation loan. Now you have more debts than when you started.

The answer to debt problems can be debt consolidation, but only in certain circumstances. If you are not sure what the right answer is for you, it’s time to talk to a professional who can review all of your options and help you decide which makes the most sense for you.

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