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Getting a loan to pay off high-interest credit cards is a big step. There are some advantages as well as some disadvantages. To make sure that a debt consolidation loan is the right option for you, check out this post before you apply.

The Secret of Debt Consolidation Loans

Lenders lure consumers in with colorful mailers and inspirational websites filled with success stories. They promise that you’ll pay down your debt faster, save money and receive fewer bills in your mailbox or inbox, which will make you happier. It’s all part of a marketing plan. These companies want to sell you something. A debt consolidation loan can easily cost you several thousand in interest and fees. Is it better to give your money to a handful of credit card companies or to one lender? Will you save anything, or would you possibly pay more with a loan?

Alternatives to Debt Consolidation Loans

Frankly, a debt consolidation loan may not be in your best interest. You’ll have another creditor and a long repayment schedule. There are other ways to lower your interest rates and get some of the perks that lenders promise.

  • If you want a lower interest rate, negotiate with your credit card company.
  • If you want fewer monthly payments, transfer your balances.
  • If you want to be debt-free by a certain date, create your own repayment plan.

Plus, as you pay down your credit cards or transfer balances, you’ll consolidate your debts and work your way toward fewer bills. Loans aren’t a first-line strategy for people who have high balances on a few accounts. They are a radical solution if you have substantial, uncontrolled debt. Here are a few things that will help you weigh the costs and benefits.

Loans vs. Your Own Repayment Plan

Before you resort to a debt consolidation loan, see if you can draw up your own repayment plan. Taking out a loan won’t necessarily help you pay down your credit card bills faster. Do the math.

With your current interest rate and monthly payments, how long will it take you to pay off your credit cards? How much will you spend on interest? To reduce these amounts, put more money toward paying off your creditors each month. There are a number of different strategies for paying off credit card balances and other debts.

Find out how much your monthly payment would be if you got the loan. Are you putting that much money toward your debts currently? If you aren’t and you can afford it, consider upping your monthly credit card budget. You’ll save money and become debt-free faster. On the other hand, if your loan payment and interest rate would be lower, you may still end up paying more due to the longer three- to five-year term.

The Debt Problem and Solution

Sometimes, debt consolidation loans are part of the problem, not the solution. These financial products don’t address the most critical part, which is determining why you went into debt in the first place and learning how you can stay out of debt in the future.

If you apply for a debt consolidation loan, stop using your credit cards. Cut them up, or keep them in your sock drawer. Don’t get in over your head. If you think that you might whip out the plastic at your favorite shop or restaurant once your credit cards are clear, a debt consolidation loan could get you into even more trouble. If you need help creating a budget and sticking to your debt repayment plan, call a certified credit counselor.

When Debt Consolidation is the Best Option

There are situations when debt consolidation loans provide much-needed relief and financial breathing room. If you identify with some of these statements, a loan is worth considering, but it still might not be the best solution.

  • Can’t get lower interest rates on your credit cards
  • Don’t qualify for hardship status
  • Are facing harsh penalties and late fees
  • Have too many bills and unsecured debts
  • Can’t afford minimum payments that are scattered throughout the month
  • Need breathing room to organize your finances and get on track
  • Will definitely save money with a debt consolidation loan

Financial Decisions

A debt consolidation loan is just one option to consider. Don’t lock yourself into anything before researching all of the possibilities. Check into balance transfers, debt management plans and different self-driven strategies to see which option appeals to you and feels like something that you could maintain on your journey toward becoming debt free.