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Debt Consolidation Loan: Right For You?

By: Michael Millington

It may sound like backwards logic to take out a loan when you’re already dealing with debt. Some might see it as compounding the situation. There’s one loan, however, that actually makes some sense in the middle of some debt situations: a debt consolidation loan. Depending on the circumstances, a debt consolidation loan might not only be a smart idea, but it might also save money.


What Is A Debt Consolidation Loan?

A debt consolidation loan is a loan like any other. Those who take one out receive a quantity of money usually equivalent to that of their currently outstanding debts. The debtor then uses that money to pay off the outstanding debts, essentially wiping out all the smaller debts and leaving the debtor with one big debt. Now, the debtor need only pay back one large debt rather than a series of smaller debts.


It’s a tactic sometimes seen in debt settlement practices. Since debt settlement often suggests having one large lump sum on hand that is not equivalent to the outstanding debt but is close to it to settle a debt, taking out a loan for that large lump sum is one way to achieve debt settlement. Those who use this tactic effectively trade one creditor for another, though they also reduce the total amount of the loan involved.


Where To Obtain A Debt Consolidation Loan

Debt consolidation loans come in many varieties., for example, can not only provide a debt consolidation loan in the form of a personal loan, but also can offer certain breeds of credit card, even for those with low credit scores. Home equity loans are also on hand, as are consolidation efforts specifically geared for the student loan. The immediate upshot to a debt consolidation loan is that it takes several outstanding debts and converts them to just one large debt. That means that there’s only one creditor to work with, and potentially even a lower interest payment.


On paper, a debt consolidation loan can be a great way to not only get some credit card debt relief, but also debt relief in general and even serve as an expedient alternative to bankruptcy. However, there’s one key problem as expressed by financial guru Dave Ramsey: debt consolidation loans don’t always work for rebuilding credit.


Issues With Debt Consolidation Loans

Debt consolidation loans, Ramsey notes, address the symptoms of debt, but not the root causes. While a debt consolidation loan will help a debtor get out of debt, it assumes a certain level of financial discipline to successfully remain out of debt. That’s not to say that everyone who gets in over their heads with credit card debt is financially weak-willed or prone to creating their own debt issues, but there does seem to be a correlation between the two concepts. Some people may lack the financial discipline necessary to keep themselves out of debt in this situation. Remember how we noted that a debt consolidation loan can save money for a debtor, which can in turn be used to the principal and a faster repayment? Not everyone would do that with a small amount of savings, and without that quicker repayment, it’s possible that the debtor would be back in financial trouble.


Ramsey notes that, in an estimated 78 percent of cases, consolidation leads to a growth in debt because debtors don’t learn relevant financial management tactics. Debtors continue to overspend, fail to save, and, financially, carry on as normal. In some cases, the option to pay down the principal amount of debt doesn’t exist, and a debt consolidation loan may carry on for years. This means the debtor pays slightly less but over a much longer period.


A debt consolidation loan isn’t a bad way to get debt help, but it does assume some circumstances that may not be in play. The financial discipline of the debtor, the circumstances of the loan, and other such matters are all vital to getting and staying out of debt. Take all these into account when considering a debt consolidation, because it may be a better strategy than even Dave Ramsey thinks.


Written by Steve Anderson