The advertisements are everywhere. They’re on TV, satellite radio, mail, web browsing, and social media. Lenders want you to bring your outstanding balances to them with the promise of a lower rate, which may or may not be true. It sounds like a good idea – make three or four different payments become one. But, not so fast.
Debt consolidation is a little bit like a shell game. Moving debt from one side to another with a different personal loan. At the end of the day, you still have the debt! The promise of a lower interest rate is largely offset by:
- Fees imposed in the debt consolidation process
- A longer loan term than you previously had, therefore extending the timeframe to pay down your debt and paying as much or more interest
As if that is not enough, depending on how you went about consolidating the debt, you may have the issue of an account with a large outstanding balance as a percentage of available credit, which is a credit score no-no.
By paying down a few different loans/cards at a time, you make room to get in to another small loan as needed. Whereas, if you have one large aggregated loan spread out over a longer term, it will take a much longer time to free up new purchasing power.
Even Dave Ramsey, the personal finance guru, agrees with me (or is it the other way around?!) Click here for more information from him about the possible traps of debt consolidation.
~ David Weyher