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Should you consolidate debt with a loan?

[Jun 24, 2011.]


Debt consolidation loans have been used successfully by many people looking to pay off multiple credit card balances and other loans. But debt loans don't work for everyone, especially people who continue the same habits that got them into debt in the first place. Here are some things to consider about using a personal loan for debt payoff.

  • A debt loan does not wipe out your debt, it simply transfers it to a different loan product. Even though a debt consolidation loan can allow you to pay off several credit cards, you'll still owe the money to a new lender. Make sure you are able to make monthly payments on the new loan or you could end up in worse financial shape.

  • Debt relief services must disclose their fees upfront and be truthful about their programs. They also must explain to you how long it should take to finish the program they offer.

  • Do not get a personal loan for debt unless you are getting a better interest rate than you currently have on existing credit lines. A debt loan should let you lower interest and monthly payments.

  • Be skeptical of debt consolidation companies that quote extremely low monthly payments because it could be scam. Anytime the information you are being given sounds too good to be true, more than likely it is. Scams are a dime a dozen in the debt relief industry, so use common sense when checking out firms.

  • Not all debts, such as student loans, should be included in debt consolidation with credit cards and other loans. Don't let a debt consolidation company pressure you into lumping all your debts together.

  • Consider debt counseling before turning to a debt consolidation loan. Debt counseling can help you work on paying down existing debt without applying for a new credit line.

  • You may not qualify for a debt loan if you have bad credit or too many credit card balances. Lenders are cautious about loaning money to people with a high debt-to-income ratio. If you are overextended and somehow manage to get approved for a loan, expect to pay a high interest rate.

If you want to find out more about whether a debt consolidation loan can help, take time to gather quotes from several lenders to become more familiar with these financial products.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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