Does a debt consolidation loan offer real savings?

May 20, 2015 |

Debt consolidation loans are very popular. They are promoted over the television, radio and in print. Lenders are quoting rates and special offers to help you save money. However not everything is what it appears to be. Do not assume that a debt consolidation loan is what you need to save money on your debts. Such a loan can actually push you over the edge if not selected and assessed properly.

Why not simply pay down debt?

Moving your debts around does little to reduce the outstanding balance. In our experience many of the debt consolidation loan applicants are actually looking for a new loan to absorb debts that they need to urgently repay but simply do not have any money to do so. For such borrowers a new loan is not necessarily the wisest solution. It only postpones the inevitable.

Be careful when applying for any new loans to consolidate debts. You need to understand the applicable repayments, costs, interest rate as well as have an exist strategy for these debts. Will you be able to afford the new loan repayment and for how long?

We like to play the devil’s advocate here and ask, if you can afford to pay the new consolidated loan, why not make payments today to reduce your debt balance? Every dollar that you manage to apply to your debt saves you interest.

Being realistic in your expectations is important. If you are looking for a consolidation loan to repay outstanding defaults or arrears, be very careful. While most unsecured lenders will decline, if one does accept check the interest rate that will apply to your debt. Make sure that this will be affordable long term and is not merely a band-aid for today.

Will a consolidation loan offer lower payments?

If all you are trying to do is reduce monthly repayments they may be better and cheaper strategies than a new loan. However if what you need is an amount of money to repay a debt that is hanging over you and you are continually chased by debt collectors over this money – then you may not benefit at all from a loan, because you are clearly not able to afford to pay money towards this debt. While this may not be the story for everyone, it is in fact a very common scenario.

Consider the repayments required under a proposed consolidation loan before deciding to accept it. In our experience some of the loans on offer are only for a short term and come at very high rates. What will you do at the end or 24 months when the debt needs to be fully repaid?

Have you considered other options?

There is a range of other debt relief options available to someone who is looking for assistance with out of control debts. While debt consolidation loans may work for some borrowers whose finances are in order, majority of applicants can do better with other strategies. If your debts are mostly in credit cards and store cards – you need to look at balance transfer cards for relief rather than a new loan. Balance transfer cards if used correctly can help you pay off card debt sooner at next to no interest rate. That is cheaper than any debt consolidation loan.


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