Before you start signing applications by the dozen, first be aware that a debt consolidation loan can actually increase your debts with high interest rates and fees, and could damage; or worsen, your credit score rating.
In addition to high rates and fees, typically there are expensive insurance requirements, not to mention that it doesn't solve the main problem of overspending, which got the consumer into trouble.
A major problem is that many consumers have such high debt that a debt consolidation loan wouldn't pay off all their bills. In many cases, maybe just one credit card. Meanwhile they still have all their other bills to pay, plus now they have to repay the debt consolidation loan which has fees in addition to interest. If they're not careful, borrowers could actually be driven to file bankruptcy.
In many cases, consumers can accomplish the exact same goal; and do it cheaper, through other forms of debt recovery without getting a single debt consolidation loan.
So why were debt consolidation loans invented? For the same reason autos were invented: supply and demand, and the manufacturers turn a profit. Hence, banks invented loan products to also earn them a profit. Sometimes these products are good or helpful for consumers; particularly those who can control their spending and have backup emergency funds should unexpected expenses arise.
But before we get to the other, non-loan options, we'll talk about the two loans typically used to consolidate debt.
Home equity loan - Home owners can borrow against the value of their homes.
Personal loan (if available) - A non-homeowner debt consolidation loan with no collateral.
People who seek the latter, an
unsecured personal loan, need to be aware they typically must have good credit to qualify (if available, review Terms/Conditions). People with bad credit would not qualify for this type of high limit, long term unsecured loan (but perhaps would qualify for an unsecured payday personal loan, limited to $1,500 and a short term of two weeks).
Yet even good credit people will pay dearly for the long term personal loan, with interest rates up to 21% or higher and with upfront fees costing up to 10% of the loan's value.
Don't be fooled: Even if a lender offers a personal loan with payments you consider affordable, do the math. Add up all those monthly payments and see how much the loan will cost you in the long term. Then think about this... what if you could pay off your debt at monthly rate less than a debt consolidation loan would charge? Yes, it's possible. Because instead of getting a loan, using it to payoff debt then having to repay the loan AND the interest AND fees, simply avoid the loan altogether and still enjoy the lower monthly payment. How? Through non-loan debt consolidation, setup for you by a professional
credit counseling agency. Or you could reduce your total debt amount even before you begin repaying. How? With
debt settlement, you can negotiate debt payoff with your creditors.
Whatever option you choose, don't forget the biggest problem... what got you into debt in the first place: spending, and not having emergency savings to cover unexpected bills.
As you repay debt, don't resume spending. Create a
personal budget, get a savings account, and stop your reliance on loans.
In summary, if you're considering a debt consolidation loan remember these points:
Debt consolidation loans can hurt your credit. The actions typically associated with these loans; applying for a new credit line and closing old accounts, can harm your FICO credit score.
It's just as possible to lower the interest rates on your debt without a debt consolidation loan. Your creditors want you to repay, and will likely assist you with repayment plans and even lowering your rate.
Instead of paying extra interest AND fees because you took out a debt consolidation loan, put that money towards your debt.
If you have good credit and insist on getting a regular or a personal debt consolidation loan, shop around.
Other non-homeowner loan option:
Auto refinancing - using the equity in your auto to get a cash loan.
