Debt Consolidation Loans: Worth the Risks?

You’ve seen the advertisements on late-night TV, heard them on the radio, and even seen them pop up on your Facebook page: companies offering debt consolidation loans that are “guaranteed” to lower your monthly payments and eliminate your debt quickly and easily.  If you are facing what seems like an insurmountable mountain of debt, it might be easy to believe that these companies can offer an easy way out.  But as the saying goes, if it sounds too good to be true, it probably is.  For many, these companies offer nothing more than high fees and greater debt, and will leave you right back where you started: with an insurmountable mountain of debt.

Why are debt consolidation loans risky?  First, debt consolidation does nothing to solve the underlying problem.  It does not force you to change the behavior that led you into debt to begin with.  When you don’t fix the underlying issues, the problem will only get worse.  Thus, debt consolidation loans may appear to make your life easier by simplifying your payments, but they’ll only work in the long term if you are financially disciplined, develop a manageable budget, and stick to it.

Second, loan consolidation companies don’t offer any services you can’t do on your own.  If you have reached the point where you are barely making minimum payments on your debt, contact your creditors directly and work with them to develop reasonable payment plans that you can manage.  The truth is, creditors don’t favor any particular service or company over any other, and if they have not yet turned your debt over to a collection agency, they are just as happy to work with you directly, as long as it means they will get their money in the end.

Third, loan consolidation services may end up costing you more in the end.  Many services charge hefty up-front fees, push “voluntary” contributions, or tack on hidden monthly fees.  Others have “pay-off” fees which prevent you from paying off the debt early.  Moreover, by consolidating your debt into one manageable minimum monthly payment, you are not paying down the balance of the debt, leaving interest to accrue and costing you more over the duration of the loan.  Finally, some consolidation loans carry hefty penalties if you miss a payment or have unrealistic payment periods.

Fourth, some consolidation loans, like lines of credit or home equity loans, require collateral such as your home.  While the promise of lower interest rates makes some consolidation loans attractive, you may be in danger of foreclosure and losing your home should you not be able to make the required payments.

So, are there alternatives to the loud chorus of voices offering you an easy way out?  Yes, there are alternatives, although they may not be easy:

• Self-help is the first place to start.  Take a hard look at your spending habits, put together a careful budget, and develop some manageable tactics for reigning in your spending habits.  Don’t shy away from contacting your creditors directly, as soon as it becomes apparent that you are not keeping up.  Remember, your creditors want to get paid, and may be willing to work with you to develop a manageable payment plan.
• Consider debt counseling.  Counselors at reputable credit counseling organizations are certified and trained professionals who will work directly with you to develop a personalized plan to tackle your debt and avoid future debt.  These organizations also offer educational workshops and information.  Many are non-profit and offered through universities, military bases, credit unions, and housing authorities.
• Do your homework.  If you are considering working with any debt relief service, be it a consolidation company or a non-profit credit counseling organization, check it out with your state Attorney General, local consumer protection agency, and Federal Trade Commission.  Find out what the business offers, how much it costs in total, and how long it will take to get the results they promise.  Never count on verbal promises: get everything in writing, and read all contracts carefully.
• Consult with a bankruptcy attorney.  “Bankruptcy” is a scary word that no one wants to hear, but in fact, it may be your best option in some cases.  Bankruptcy can allow you to settle your debts without losing your home or other assets and give you a chance to make a fresh start.  Speaking with a bankruptcy attorney will help you understand what it entails, navigate the risks and benefits, and choose whether it is the best option for you.