Debt Consolidation Loans: Pros and Cons

If you’re mired in debt, you may perk up when you hear about a loan that promises to:
* Save you money by lumping your debts into one loan with a lower interest rate.
* Spare you payment hassles by providing the convenience of making one loan payment each month, instead of multiple monthly payments to numerous creditors.

Maybe you’d be eager to jump at such an offer. But first, ask yourself crucial questions.

What will really change?
You might consolidate your debts into one loan in various ways, if you qualify. You could take out a home equity loan for the total amount you owe in credit cards and other consumer debt. You could put several credit card balances onto only one lower-rate card. Or you could obtain a signature loan, unsecured by collateral, to cover the total debt amount.

But a debt consolidation loan often becomes a Band-Aid, experts say, because people don’t change the behavior that caused their debt problems. Studies show that 80% of borrowers who consolidate their debts end up repeating their mistakes and end up in deeper debt.

Can you afford the loan?
Let’s say you’re determined to mend your ways, and a debt consolidation loan is one option. You’ll replace lots of payments with one bigger payment. But be sure it fits into your budget.

Consider, too, the total you’ll pay over the life of the loan. If you consolidate credit card debts into a 15-year home equity loan or unsecured loan, you’ll be stretching a five-year debt to 15 years. You could end up paying as much or more in total interest and principal. The total payment is key, not just the monthly payment.

Can you trust the lender?
A reputable lender will determine if you can afford to pay it back before giving you a loan. But some lenders give loans to anybody just to make a buck. Work with the professionals at Hopewell Federal Credit Union—a lender you know has your best interests at heart.

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