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Are Consolidation Loans Good or Bad?

If you have accrued lots of debts and are looking towards a path of financial recovery, our debt counselors want you to know that you have options. And if you owe multiple debts on a number of different credit cards, you may have considered consolidation loans. While consolidation loans aren’t strictly good or bad, there’s some important information you should know before taking out a loan.

Consolidation loans aren't your only option for paying off debt.

Consolidation loans aren’t your only option for paying off debt.

Consolidation Loans: Good or Bad?

What is a consolidation loan?

If you have racked up excessive debt, a consolidation loan may seem like an appealing option. Consolidation loans allow you to take out a new loan to pay off existing debts to multiple creditors. Consolidating debt can be a good option for consumers who have trouble keeping up with multiple monthly payments. But, to be worth your while, you must finance this new loan at a lower interest rate than your current balances. Unfortunately, you may have a low credit rating which means you’ll pay a high interest rate for your loan.

If you successfully secure a lower interest rate, this method of debt relief can help to lower your monthly payments and get you out of debt. But, consolidation loans can be risky for a few reasons. If you don’t address the root of your financial problems, consolidation loans can leave you even deeper in debt. For example, after securing a consolidation loan, some debtors are tempted to charge to their newly paid-off credit cards. Thus, incurring even more debt on newly repaid cards, and defeating the purpose of a loan. In addition, a consolidation loan requires debtors to put up collateral, and this limits their future borrowing power and could place their property at risk if they can’t make their monthly payments.

What are my options?

As always, the best way to consolidate debt may vary depending on your financial situation. For some, the best way to consolidate debt may be paying off smaller balances first and then tackling bigger bills. For others, a debt management program may be the most logical option. Either way, taking out a loan without the proper information comes with a number of risks. Always do your research to ensure that any financial decision is in your best interest.

Consolidation loans aren’t strictly negative, but it can be beneficial to look into other debt consolidation options that don’t require borrowing even more money. While seeking out a for-profit company may seem like the quickest get out of debt option, remember that they can charge steep fees or otherwise take advantage of your situation. Your interests may be better represented by a non-profit company like ACCC.

There’s no ‘right’ way to manage debt. In the meantime, consider all of the ways you can work to get out of debt. And, make a plan that will help keep you debt free in the long run.

If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today. 


Madison is a Marketing Communications & Programs Associate at ACCC. She is excited to share her tips on saving money and being financially responsible here on the Talking Cents blog!

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