Debt Consolidation Loans: Tips, Pros and Cons

by Millie Kay G. on Debt, Credit and Loans

Some more ideas on how to consolidate debt.

Every month it seems like my bills grow bigger and bulkier. Some people I know are even talking about bankruptcy, but before they take that step, they might want to consider the prospect of debt consolidation. With debt consolidation, they would take out a loan to pay off various existing debts.

Say I have a few credit cards, an auto loan, and several other loans at different interest rates. By reducing the debt down to one loan, I might benefit from a lower interest rate — and I won’t feel so overwhelmed by trying to keep up with all the different creditors.

Once I have my debts listed with their amounts and interest rates, I can check out a debt consolidation calculator. Using it, I can see what kind of impact a new loan would have on my debts.

Lower Your Debt With Debt Consolidation Loans

You can actually reduce your debt on your own by trying out a few strategies that involve pursuing personal loans with lower interest rates. To pay off debt faster with debt consolidation loans, check out these options:

1. Balance Transfer Credit Cards

If you’ve got the discipline to pay off your credit card balance in a short time frame and if you’ve got a good track record with card companies, you may be a suitable candidate for using a 0% balance transfer credit card. Here are a few such cards we like:

Credit Card
Interest Rate
Transfer Fee
Discover Escape Card 0% for 6 months 3% transfer fee
Discover Miles Card 0% for 6 months 3% transfer fee
Discover More Card 0% for 12 months 5% transfer fee
Discover More Platinum Card 0% for 12 months 3% transfer fee
Discover More Sealife Card 0% for 6 months 3% transfer fee
Discover More Clear 0% for 6 months 3% transfer fee
Discover More American Flag 0% for 6 months 3% transfer fee
Visa Black Card 0% for 6 months No balance transfer fee / $495 annual fee
TrueEarnings Card from American Express and Costco 0% on purchases for 3 months, 1.99% bt for 6 months No balance transfer fee
Starwood Preferred Guest Card from American Express 2.9% for 6 months No balance transfer fee

If you move your existing balance to such credit cards, you won’t have to pay any interest on it for a limited period of time — an excellent deal for anyone who’s serious about eliminating their card debt. You’ll have to make sure you wipe out this debt before the 0% APR promotional period is over or you’ll end up with much higher rates than you bargained for.

2. A Peer To Peer Lending Network

There are p2p lending companies that offer unsecured loans at much lower rates than what you’ll find at banks or other financial institutions. They often quote you rates that are much lower than those charged by regular credit cards. If you’ve got good credit, you’ll be able to qualify for loans at fixed rates and which can be paid off with predictable, fixed installments on a periodic basis. The terms for such loans are typically 3 years (which can be paid off earlier than this).

For more information, you can visit either the Lending Club site or the Prosper site or check out our Lending Club review.

Some Pros & Cons of Debt Consolidation Loans

There are of course, other types of debt consolidation loans beyond those we just explored. Beyond the peer to peer loan and the zero percent credit card loan, there’s also the home equity loan or line of credit, as well as a traditional debt consolidation loan.

With the home equity loan or line of credit, you could borrow against your home’s value to pay off your debts. However, if you have trouble paying off this new loan, you run the risk of losing your home since it’s pretty much used as collateral.

The zero percent credit card option definitely sounds attractive; you can switch to these credit cards on the lure of a low promotional interest rate, with no fees for balance transfers. But what if you hold onto the old cards (which used to carry your old balance amounts)? This might give you a chance to run up your balances all over again, so be careful!

As for the traditional debt consolidation loan, it may be difficult to find one with attractive interest rates. You can contact your local banks and credit unions or search for such loans online.

A Look At Debt Consolidation Companies

What about debt consolidation companies? Do debt consolidation programs work? For a fee, these companies will offer to contact your creditors, then send out monthly payments on your behalf. Although I like the idea of setting up a single payment and letting a representative handle the credit card companies I deal with, there are some risks involved.

For instance, you’ll have to watch out for unscrupulous companies that may cause you to make late payments; by their advice, you can end up running up your debt which will then keep you in their program longer. Also, if you never learn how to manage your debt on your own, you’ll just let your credit history repeat itself.

Note that depending on their business model, some debt consolidation companies make money by performing debt management tasks in behalf of their clients, so the longer their customers stay in debt, the more money the companies make. If you decide to go with such companies, make sure that you check their records with the Better Business Bureau and that you do your due diligence before signing up with anyone.

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{ 2 comments… read them below or add one }

1 LeanLifeCoach December 29, 2009 at 6:53 am

Personally, I am a fan of doing it yourself, so I lean towards number 1&2. But how do you balance the concern of your FICO score with taking out more/new credit? Do you just worry about that later?

2 Lisa Smith June 24, 2010 at 5:22 am

hi very nice post. These pros and cons are really straight to the point. I really like the zero APR credit card option. keep it up the great work.

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