Use of Debt Consolidation Loans
Consolidation loans are not for everyone and can be dangerous if you aren’t careful. There are a lot of stupid people who don’t pay attention when they consolidate their loans. Sometimes the interest rate can be higher than the total APR on your current debt. Some unscrupulous lenders charge an enormous up front fee that they don’t go out of their way to tell you about. Some of these same lenders might even roll the fee into the loan payments so hide it. If the loan’s APR is higher than your credit cards, you’ll lose money and should not close on the loan. Don’t consolidate just for the sake of consolidating. The word is misleadingly dangerous. Your brain tricks you into thinking that consolidation means less. Most people think consolidation loan means they’ll pay less, but that may not be the case. Consolidation just means that the monthly payments from your creditors will be consolidated into one payment to one consolidation lender. Basically you can’t just borrow your way out of debt (DUH!), you must pay it off. A consolidation loan should only be considered if the interest rate is less than all the credit you owe AND you close out all of the accounts you paid off.
Consolidation loans are dangerous for impulsive people because all you are really doing is shifting all your debt from one place to another, effectively opening another channel of credit, while freeing up your credit cards. Some idiots then proceed to fill up their credit cards again, now they have double the debt they started with, and they are paying up to 22% on their consolidation loan because they weren’t paying attention to the APR when they signed up. Some consolidation lenders are unscrupulous and make it appear they are eliminating your debt, when you are really taking on more debt. They often hide the APR from you and try to charge up front fees for loans, which is illegal. They might also offer you a lower payment, but check their math and you might discover that it ends up costing you more than your original bills. Don’t fall for this scam! Always check their numbers.