The main goal of a debt consolidation loan for many people is to get out of debt as quickly as possible. People can save a few dollars each month by combining their debts. At the same time, each payment goes toward paying down the debt. Because they only have to make one payment each month instead of many, they save money on interest and time.
A loan to consolidate debt can backfire and make the person's debt load even heavier instead of lighter. For example, loans are almost always advertised as having low interest rates and nice package perks, which encourages people who want to sign up right away. So, what happens when someone doesn't really read the fine print and doesn't shop beyond what looks good on TV? Well, to put it simply, those people often end up with interest rates that aren't very good and customer service that isn't as good as if they had looked around for the best deal.
Even though Debt Consolidation Loans have a great idea — putting all of your bills into one loan with one monthly payment and a better interest rate — they also have a few problems. One is that people take out too many of them, so instead of paying off their loans, they get a loan that lasts forever and costs more in interest over time.
Another big problem with debt consolidation loans is that they make it look like everything is under control, so the person goes back to spending too much and getting more debt. Even though more money is coming back into the home, that doesn't mean it should be spent right away on more consumer debt, but that's often what happens. Then, at some point, a new tool for managing debt will be needed to pay off both the new charges and the balance from the original consolidation loan. It turns out to be a real catch-22.
So, if you're thinking about getting a debt consolidation loan, make sure to look around for the best loan programme and consider credit counselling to learn more about how your spending habits can affect how well the loan works as a solution to your debt.
