Feel like you’re drowning in debt? I know that feeling all to well. When you’re standing at the bottom of a debt mountain, you might feel like there’s no way to even begin climbing it. Wait a second, you think. What about a debt consolidation loan? I’ll just combine all these different debts into one and work on paying that down!
A debt consolidation loan might be helpful for you, but it can easily create a bigger problem for some people. SO let’s figure out exactly what you’re getting into when you take out a debt consolidation loan.
What is a Debt Consolidation Loan?
Before you dive into anything when it comes to your money, you should know exactly what you’re getting into!
Debt consolidation takes multiple loans and melds them into one loan with a new interest rate and a new length of payment. For example, say you’re debt total is $50,000. You’ve got one loan at $10,000 and 15% interest, two loans at $7,000 and 12% interest, and a $26,000 loan at 7% interest. A debt consolidation offer would take all that debt across your different lenders and combine it all. They they offer you a new loan of all your debt with one interest rate, new payment terms, and possibly a lower monthly payment.
What You Need to Know Before You Consolidate
At first glance, debt consolidation loans seem like a no-brainer. Of course you want one easy, possibly lower monthly payment! But we know that nothing comes that easy.
The sneaky thing about debt consolidation is that it often lengthens the terms of your debt payoff. Many debts come with fixed payment terms; you take out a student loan and you have ten years to pay it back. You take out an auto loan and you have three years to pay it back.
If you’re already 7 years into a student loan payment term, debt consolidation can cause it to start over, and give you another decade. This means that even though you may have gotten a lower interest rate, you can end up paying more simply because you’ve just added another 10 years of payments!
And let’s talk about that interest rate; there is NO guarantee that you’ll get a lower rate. That depends on your credit score and credit history. If you’ve got bad credit, debt consolidation could come with a higher interest rate.
Where to Start
If you’ve done your homework, negotiated with lenders, you might have scored a better deal with a debt consolidation loan. So feel free to go for it! But if you want it to be the magic bullet that finally kills your debt, you shouldn’t hold your breath.
Spend a few months changing your own habits before you consider debt consolidation. Try cutting back and earning more, and see if simply changing your own behaviors helps that debt start to go down.
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