One of the most controversial areas in financial planning is the concept of debt consolidation loans. The idea behind a debt consolidation loan is that you take your high-interest debt, which is usually debt from credit cards or from retail accounts, and you put it into a single loan with better terms and a lower interest rate.
What does it do?
A debt consolidation loan might take five smaller loans or accounts, pay them all off, and give you a single larger loan. A debt consolidation loan doesn’t actually reduce your debt, it just forces it all into one optimized bucket. This kind of personal loan lets you create a debt consolidation plan that will, eventually, get you out of debt altogether.
What’s bad about it?
First of all, you need to know that a personal loan for debt consolidation, as said above, doesn’t do anything to reduce your debt it just organizes it. In addition, it takes longer to pay off debt that’s been consolidated. Yes, there may be a lower interest rate, but you may wind up paying the same or more in fees and interest because of the longer term. There’s also the danger that the person who takes out a personal loan for debt consolidation will turn right around and incur more debt, especially if the debt being paid off was in the form of credit cards or retail credit accounts.
Why it’s still a good idea
Given all of that, there are still compelling reasons to use this kind of a loan. Here are some of the reasons a debt consolidation personal loan is a good idea:
If you do it right, pay it off on time and don’t re-incur some of the types of debt that led to the problem in the first place, a debt consolidation personal loan can be a wonderful thing.