In general, a debt consolidation loan can be defined as a loan that combines multiple debt obligations into one single loan. These loans tend to have lower interest rates than many of the existing debts. They also allow the borrower to make only one payment per month instead of many. These loans are generally available from banks, credit unions, and other financial institutions. Let’s compare the advantages and disadvantages.

Potential Advantages

• Pays off high-interest credit cards or other debts with low-interest loans.
• One easy monthly payment to make.
• A closed-end loan will result in a set payment schedule (payments and length of the loan are pre-determined).
• May result in lower overall monthly payments.
• Establishes good credit history, if paid back as agreed.

Potential Disadvantages

• Some type of collateral may be required before approval.
• A co-signor on the loan may be required before approval.
• Credit score will be a significant factor before approval.
• No ongoing financial education or coaching is provided.
• Paying creditors with credit — shifting debt, not reducing debt.
• Self-discipline (i.e., be cautious with spending) is required. It is still possible to use other lines of credit.

As you can see, there are some important factors to consider. If you are struggling with high credit card debt, you must first strive to change your spending habits and learn to always live within your means. It makes no sense to consider a debt consolidation loan if you will be continuing to incur monthly balances on your credit cards. In that case, all you are doing by consolidating your debts is shifting debt instead of paying down debt. In the long run, you will have a higher overall debt balance if your spending behavior does not change.

If you are worried about debt, and you would like to talk to someone, GreenPath offers free debt counseling from certified credit counselors.  A counselor will work with you to explain your debt management options and offer recommendations based on your situation. These sessions are confidential and no-pressure. We are here to help you meet your financial goals.

 

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