Legal Aid Facts

If you owe money to multiple creditors, you know what a pain it is to pay numerous bills every month. You’re also probably seeking to lower the total monthly amount that you pay.

A lot of people in these circumstances consider turning to debt consolidation loans - but there are some things that you should know before you make the decision to apply for one.

First of all, you generally are going to have to pay some kind of fee to the debt consolidation company, so you are going to owe MORE than when you started. The loan term may be longer - so you may be paying a little bit less every month, which means that you will have payments for a much longer period.

So debt consolidation loans may lower your payments each month but in the long run you will end up paying more money, possibly a lot more.

Also, if you are late on your payments, or have less than perfect credit for other reasons, you are likely to be charged higher interest rates. The people who need debt consolidation loans the most are those who are likely to get charged very high interest rates.

There are also a number of reasons that debt consolidation loans can hurt your credit. You will have to apply for new credit to get one, and applying for new credit lowers your credit score. You will be closing a number of old established credit lines, which also lowers your credit score.

And if the loan requires that you negotiate with creditors to get a “deficiency balance”, that counts against your credit just like late payments. That means that creditors agree to accept less then you owe them so that you will repay them something; that’s always risky. For one thing in many states it is legal for creditors to renege on that agreement, and for another it hurts your credit.

And here’s a final argument against debt consolidation loans; they don’t address the problem that got you into trouble in the first place - which in most cases is poor fiscal habits.

So you might not have to make a payment for a month or two, and then you start paying a lower amount - and what many consumer agencies report finding is that people who take out debt consolidation loans end up getting even DEEPER in debt!

So consider all of the possible negative ramifications, and be truly committed to changing your spending habits, before applying for a debt consolidation loan.