When to Use a Debt Consolidation Loan

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Debt Consolidation Factors

If an individual has good credit but has monthly outflow which exceeds monthly income then a debt consolidation loan may be the right move. A consolidation loan can offer 1 payment that is often less than the various small payments combined. In addition the interest rate of the new loan can generally beat the higher rates of credit cards and personal loans. At this point the individual can often afford to make the new reduced monthly payment and they save money on interest in the long run. The main pitfall is the temptation to return to previous spending habits. Unfortunately, many individuals run up balances on their credit cards and end up in worse financial shape than before they consolidated. A secondary consideration is the fees associated with the loans. It is wise to check for excessive fees before you reach a decision to use a debt consolidation loan. In addition, a debt consolidation loan can be looked upon negatively by a credit reporting agency. This should be weighed against the fact that your credit score would be damaged if you started making late payments on your existing loans. There is no simple answer as to when or if a debt consolidation loan should be used but all of these areas should be considered.

If an individual has bad credit or has incurred massive amounts of debt in relation to income than there are additional variables to consider. One such variable is interest rate. A bad credit consolidation loan will generally have a high rate which could exceed the smaller loans that are being consolidated. In this case it would cost the individual more money in interest over the long run. Another factor to consider is whether the new consolidation loan will comfortably fit within the individual's budget. Often times there are stipulations on such loans stating stiff penalties associated with late payments. Paying consistent late fees on 1 large loan could add up to quite a bit more than consistent late fees one a couple small loans. It is also important to analyze any other fees that the lender may attach to the loan. All of these factors should be considered before determining whether the loan is a good fit for a person's financial situation.

Keep in mind that an individual's situation may change from time to time. (i.e. income, debt amount, etc.) While it is true that unforeseen events happen to us all it is wise to thoughtfully consider whether tomorrow's budget will be able to match today's commitments. This should help to determine if and possibly when to use a debt consolidation loan.

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.