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How Personal Loans Can Kill Debt

Posted December 1st, 2009
by Staff

Grim ReaperOne 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:

  • Lower interest rate. With some credit card rates at 20 percent or higher, you’re going to save money on interest with this kind of a loan.
  • Ease of use. Trying to keep track of six or seven different accounts to pay each month can be a nightmare. The simple act of organizing your debt makes it less likely you’ll make a mistake and miss a payment on one of the accounts one month.
  • A fixed interest rate. Retail credit accounts and credit cards often have rates that change. With a personal loan, you lock in a rate and make it easier to plan financially.

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.

Categories: Advice


What people are saying:

Share Your Thoughts
  • Posted April 13th, 2010 by Mike - Loan Advisor at 12:00 pm -

    Interest rates have started an upward trend so in my opinion this should also be a factor when deciding to take out a loan for debt consolaidation. Historical data shows that interest rates have a cycle of high and low which repeats itself roughly every 4 years.

  • Posted June 14th, 2010 by Finance Dave at 10:55 am -

    I think a debt consolidation loan makes a lot of sense, as long as the individual is changing the behavior that caused them to fall into debt in the first place.

  • Posted June 15th, 2010 by Stacey at 10:14 am -

    Alright, so are some of these debt consolidation firms for-profit and some are not-for-profit? I feel like I always see them advertising on TV and I am skeptical they are doing this kind of service for free


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