Is Debt Consolidation A Con?

You are in debt and finding yourself falling further and further behind. Yes, you are making minimum payments on all three credit cards but two cards are maxed out and the third one will soon be. Before long, even making minimum payments will become a bit of a chore as higher prices at the pump and flat commissions on your job have taken their toll. Just when you are about to throw up your hands in disgust an offer comes in the mail that on face value seems to have merit to it: a debt consolidation loan. Promising the paying off of existing debt in exchange for one low monthly payment, you decide to pick up the phone and give the financing company a call. After your conversation with the loan officer you find yourself still wondering if the lender's offer is really worth it.

For good reason you have doubts about the debt consolidation loan. Ideally, a debt consolidation loan would pay off all of your debt and replace it with one, low monthly payment. At least that is what the ad says it will do!

In reality, that may not happen. In fact, your already bad credit could scuttle the loan or force you to accept a high interest rate on your consolidated loan. Please note, a debt consolidation loan is unsecured debt - just like your credit cards - so this means your loan rate will be much higher than a personal loan secured by something like your home or a bank account. Thus, your hopes of securing a loan rate of 8, 12 even 15% are not likely. Try 19.9%, even higher!

What you could end up doing is: trading three difficult to manage debts for one impossible to manage debt. Or, to secure the lower monthly payment you could find your loan dragged out for 10, 12, even 15 years. On the other hand, if you stop using your credit cards and work toward reducing your debt, you could see your bills paid off in 5 or 6 years time. A big difference in repayment time and you'd save half in interest too.

Ultimately, the big problem for you is changing your behavior. You may need to take on a second job to have the funds available to reduce your debt or you could contact your credit card providers and tell them you are in a dire situation. Hint that you are considering bankruptcy and you may find your APR magically reduced overnight. At least it is worth a try!