Consolidation Loans
Is it a Benefit or a Danger?
By Daniel Muniz

For anyone saddled by debt, especially from numerous high-interest creditors, a bill’s consolidation loan sounds like the simple solution to solving a lot of serious problems before they get out of hand. But is the issue truly resolved or is a bigger problem merely delayed until it finally blows up in your face?

There is quite a bit of criticism about debt consolidation loans and about how effective they really are.

If you have a lot of pesky creditors and you cannot even make the minimum payments, then it is a no-brainer that you need to combine all those accounts into one simple monthly payment. And of course, the longer the life of the note, the lower the monthly payments will be, which greatly improves cash flow.

And there is no reason to jeopardize or even trash your credit score by falling behind on payments to your creditors. Or worse, having the collection agency pests harassing you and totally ruining your credit. If it took years to develop a solid credit history and a good score, why allow it to go down the tubes when it can all be averted?

But the reason for the criticism is that many people really do not manage their debt; they simply add to debt they already have with additional spending that makes the problem even worse. And for those who use a home equity loan, not only do they risk trashing their credit but also stand to lose their house.

And it is easy to understand the temptation of making a bad situation even worse.

Someone living paycheck to paycheck and having all of their money sucked into paying bills at every payday, it is a huge relief to have some extra cash left over. But instead of utilizing the left over money into creating a better financial cushion, it often times get spent on other things. Unfortunately, the spending doesn’t stop there.

Even someone who has a debt-laden credit situation, there are still plenty of creditors, especially sub-prime outfits, who are more than willing to let you fall deeper into debt. A few additional accounts here and there over the course of time and then it doesn’t take long for things to get out of control by not being able to make minimum payments. And with a bigger debt structure, the situation is now worse than the first time you were in the hole.

And the hole is now so much bigger and deeper. Not only do you have the first debt consolidation loan to service, but the newer accounts need cash too. So whatever effectiveness a bill’s consolidation loan once had is now lost.

Overall, if the spending behavior is not corrected, then what is to stop someone from getting into a bigger problem with a second loan (provided that you are able to get it)?

First of all, I have taken a bill’s consolidation loan myself and I must admit that it pulled my chestnuts out of the fire. But still being newly married and then having a new addition to the family, more expenses slowly crept in. As a result, I just got a second bill’s consolidation to combine all of the new accounts into one payment. However, I then moved into a bigger house and it was just a matter of time before I got deeper into debt. At that point, my debt to income ratio went into orbit and no bank or credit union wanted to touch me even with a ten-foot credit card.

Fortunately I didn’t fall into the abyss as I began to take a firmer control of managing my debt and adopted a more Spartan lifestyle for the time being. I still preserved my good credit rating while I modified a few behaviors. Although I can empathize with people in a similar situation, like marriage, a baby, and a bigger house payment but that still is not an excuse for having a lack of financial discipline. And I feel better that I learned my lesson but I could see how easy it is to fall right back into the debt hole worse off than when I first started.

But bill’s consolidation loans don’t have to create more problems than what they were supposed to solve.

The first step after obtaining such a loan is to modify spending behavior. It’s a lot easier said than done especially if you are in a marriage with kids. But just about everybody can plug up several discretionary items that they really don’t need such as cutting back on eating out for lunch or dinner or just not doing certain recreational activities. It also means living a more Spartan lifestyle but that sure beats living in the poor house.

The next step is to stop acquiring new debt unless it is an absolute emergency. You cannot prevent emergencies since they just happen but you can prevent just about everything else.

And with the improved cash flow, it is vitally important to establish a cash savings. Unfortunately in this day and age, a lot of people tend to think that savings accounts are for losers who cannot qualify for credit. Nothing could be further from the truth. A savings or an emergency fund can provide that safety net when the unexpected or the emergencies happen. It is also there whenever you come up short on bills.

But saving money has to be the hardest step for anyone who is accustomed to spending every last dollar. That is why spending behavior must be modified. It is similar to someone adjusting to a new diet, like deciding to eat until you are full instead of eating everything on your plate just because it’s there. The same goes with extra cash. Too many people feel that the only purpose money serves is to burn a hole in your wallet. The better place for it is in a savings account.

Finally, get better finances.

Unless you are living in a bomb shelter, you are part of a credit-based society. But not all credit is equal. It is such a tragedy that too many people refuse to shop around for better financing terms although they don’t mind shopping for the big ticket items that the financing is for.

Of course it’s a hassle to call banks and credit unions but it is definitely worth it. Simply ask to speak to the loan department. Be sure to avoid talking to a customer service representative because their role is to only take information and they often know little else about how the lending process works. Next, simply explain your credit situation, approximate credit score, debt to income ratio and what you are looking for in a loan.

I have had a number of people tell me right off where I stand in getting a loan before getting my credit checked. And I simply avoided the ones who told me that I have to apply first in order to find out.

Overall, a bill’s consolidation loan can be the answer to your debt problems but if and only if you are pursuing it as a cure to your troubles instead of simply making them worse.

Any opinions or views expressed herein belong solely to the author and does not represent any employer, organization, political party, governmental agency, or any other entity and do not necessarily reflect the views of the site owner or its participants.