The Trap of Using Personal Loans for Debt Consolidation

A Credit Article Contributed by Mark Mcclelland

Financing Debt Consolidation with a Personal Loan is Probably Not the Way to Go

Most folks with sizable credit card balances often view an unsecured personal debt consolidation loan as the "silver bullet" to their financial crisis. Their simple reasoning is that instead of having to pay who knows how many individual monthly credit card bills, they'll be able to pay just one, and with a lower monthly payment to-boot. Sure sounds great doesn't it?

But the logic is shortsighted. The fact of the matter is that using personal loans to consolidate your debts is nothing short of a happy sleigh ride into bankruptcy.

There are two major flaws in their reasoning:

The first is that borrowing to consolidate their debts won't do anything to actually solve the problem(s) that put them in the hot seat to begin with. Their spending habits, buying gadgets and gizmos they didn't actually need or really want, is more likely than not what brought them here in the first place. This debt consolidation loan solution is not really a solution at all.

And secondly, these types of loans can be far more expensive to pay off in the end than the debt they're actually intended to pay off; the loans are often laden with hidden fees, like unnecessary and expensive insurance, and other charges and conditions that simply boost the profit margins of the sharks that make these kinds of loans.

And the Major Problem with Using Personal Loans for Debt Consolidation Is?

But major problem is that people don't focus on what's most important; instead they're distracted by side issues. What's important is paying off your debts.... and that means paying more each month, not less. Even if that requires an adjustment in your lifestyle, paying off your debt is what's important.

The fact is, you probably don't need a debt consolidation loan, personal or otherwise, to dig yourself out from under that mountain of debt you've built up. And the fastest way to do so is to make the absolutely largest monthly payments possible on your highest interest rate, non tax-deductible debt, usually a credit card. Pay the minimums on all your other debts until this high-rate debt is completely paid off.

Then take the same amount each month and apply it to your next highest interest rate debt. Continue doing this until you're debt-free. See, it's not all that hard, so long as plan your play and play your plan.

Personal Loans for Debt Consolidation

But if you're actually going to consider taking out another loan to pay off your debts, make sure that you keep the following points in mind:

Personal debt consolidation loans are often considered to be a derogatory notice on your credit reports. The actions taken to get such a loan, like closing accounts and such can actually damage your credit score. Although the benefits might outweigh the drop in your credit score, it's likely that you'd be able to find a better way to pay off your debts.

Be sure to shop around when looking for a debt consolidation loan. If you belong to a credit union, that's the place to start, since they often offer the best rates on personal loans. But be sure to check out all the rates you're offered, from whatever source, against those posted by Bankrate.com to get a feel for the current going rates. And avoid any add-ons, like credit insurance, that you can - they're a waste of money, providing little if any benefit in return for your money.

And finally, stop using your credit cards. Period. Regardless of the route you take to paying off your debts, be it a personal debt consolidation loan, or a debt management program, or simply sucking it up and doing it yourself, you'll have to stop using your credit cards to finance a lifestyle you can't afford if you expect to make any progress at all.

Although you don't really need to close your accounts, you will need to make it more difficult for you to use your cards, like cutting them up, or freezing them in a block of ice, or putting them in a lock box at the bank, or anything that'll make it more difficult for you to spend more than you have.