Debt Consolidation Loans – An OppLoans Q&A with Ann Logue, MBA, CFA
If you’re juggling multiple debts and/or loans, you know the pain of keeping track of due dates and minimum payments. A debt consolidation loan could be a solution for you. But what is it? And are there drawbacks to consider? Anne Logue is a lecturer in finance at the University of Illinois at Chicago. She knows finance, what works, what doesn’t, and what kind of financial products you should avoid at all costs. We asked her to break down the concept of debt consolidation loans.
What is a Debt Consolidation Loan?
If you have multiple outstanding debts or loans, you can group them together by taking out a large single loan to cover all (or many) of your pre-existing debts. That’s a debt consolidation loan, also sometimes known as a refinancing.
Essentially, you take out a new loan and use the money to pay off all of your other loans. It’s designed to be more convenient since you’ll only have one payment to keep track of. It should have an interest rate that’s the same or better than the average rate of the debt you have outstanding now. It can be a good strategic decision, though it may also extend the number of years your debt is outstanding.
When should I consider a Debt Consolidation Loan?
There are two good reasons to consider a debt consolidation loan. The first is if you are having trouble keeping track of the payments on the loans that you have outstanding now. The second is that you may be able to reduce the average interest rate that you pay. A debt consolidation loan will give you one payment to track. If you can lower the interest rate, then you may be able to pay less over the life of the loan.
Are there different types of Debt Consolidation Loans?
Debt consolidation loans are standard personal installment loans, for the most part. There are a few exceptions. The first is student loans. There is a program for consolidating student loans, and you can find out more from the U.S. Department of Education. The second is that people sometimes use a home equity loan to consolidate their debts. The advantage of that is that the interest rate can be really low, but if you don’t pay it off, you can lose your house.
What is the advantage of a Debt Consolidation Loan?
The big advantage of a debt consolidation loan is the convenience. It’s hard to keep track of a lot of different due dates and minimum payments. If you make a mistake, you end up getting hit with late fees and interest penalties. The second advantage is that you may be able to reduce the interest rate that you pay, which will save you money.
Is a Debt Consolidation Loan safe? Are there any drawbacks?
A debt consolidation loan is as safe as any other loan: all you have to do is pay it back. Some people will take out a debt consolidation loan to take care of their old debts, and then charge up a whole bunch of new ones. That’s a money management problem.
Another problem is that if you extend the amount of time it takes to pay off the debts, you’ll end up paying more in interest and be in debt longer than if you didn’t consolidate the loans.
Can I consolidate my own debt myself or do I have to work through a third party like a credit counselor?
You can consolidate the debt yourself. Take out one loan, then use the proceeds to pay off all the old ones. Make sure you pay off the old ones, though! If you aren’t very disciplined, a credit counselor can make sure that the old debts are taken care of. Some credit counselors charge fees for their services, so you want to do some research if you go that route. You should not have to pay a fee. The National Foundation for Credit Counseling and the Financial Counseling Association of America are two ways to find a reputable credit counseling service.
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