Are debt consolidation loans as evil as they sound or do they serve a purpose? Looking at the cons of debt consolidation we see the following can be true for some:
Debt Consolidation Cons
- Encourages more debt as most end up acquiring more debt in the process
- Doesn’t promote responsibility of paying down debt
- Moves money around and doesn’t really have an impact on credit score
Now that we’ve looked at the negatives of debt consolidation, let’s discuss the positives:
Debt Consolidation Pros
- Consolidate scattered debt into 1 monthly payment
- Payment is often lower than paying several accounts at once
- Lower interest rate
- Allows borrower to focus on one debt and avoid late fees
Debt Consolidation Alternatives
The following are alternatives to debt consolidation:
Balance Transfer Credit Cards
These are a particularly good option especially if the rate is 0% or less than the average of all interest rates you are paying on other accounts. Since credit cards require a minimum balance it is important that you call up customer service to determine what the total balance will be including all, if any fees as well as the required monthly payment. Then determine if the payment will be less than the sum total of the payments you currently make on all of the other accounts.
Peer To Peer Lending Networks
Prosper and Lending Club are alternatives which offer lower interest rates to customers who may find their bank’s credit card rates ridiculous. While your credit card company may charge 24%, social lending rates hover around 7-12% depending on your credit. Social Lending networks offer up an alternative to high interest rates charged by banks, but you will have your credit checked thoroughly so this isn’t like getting a loan from Mom and Dad. Don’t let the low interest rate fool ya!
This might as well be another form of a debt consolidation loan as there really is no difference. However, given the tight credit environment, telling the bank that you plan to use this for debt consolidation isn’t a good idea. Banks tend to hold the view that you will just go back into debt as soon as the other debts are paid off. This means bad news for them when you can’t make payments. Generally, if your total debt is low then a personal loan may be a good idea but watch out for how much you pay back (principal + interest) as it is tempting to stretch out the monthly payments to get a lower monthly payment.
Thoughts? Are debt consolidation loans bad or do they serve a purpose for those able to manage the responsibility?