Loan consolidation is one of the worst things you can do, but seems to be the most popular way to go for recent generations. You’ve all seen the ads on TV and the radio offering “one great, low monthly payment”. That may be true but what they don’t tell you is that the interest rate is probably over and above what you are paying now.

The only reason they achieve the lower payment is by stretching the debt out across more years. So effectively you spend more money on interest than you would have by not consolidating. There is a reason banks/institutions want you to do this. They make major money on everyone that does.

Lately they have even offered to consolidate other things besides credit card debt into these consolidated loans such as cars or other large item purchases.

Why would you ever do this? Now when your car dies and you need a replacement, suddenly you can’t get one because of all the negative equity tied into the loan. Trust me, I fell into this once. I did not consolidate my credit card debt but rather a car loan and my trailer house loan thinking at the time it would be paid off before I needed to sell/trade either.

Boy was I wrong. About a year later I needed to sell the car (it was a lemon) and I had a real hard time getting out of the loan on solid ground. My trailer was already for sale as I had bought a house and luckily it sold so I could sell my car after putting all my trailer house equity against the loan.

Another reason not to consolidate is your credit score is based on a ratio of revolving accounts (credit cards). What this means is if you have a 10,000 limit and you consolidate all your cards onto that one card and use up the entire limit, then your revolving accounts have a 100% used to available limit.

If you keep 3 or 4 cards with 6-7 thousand dollar limits, but only have a couple thousand on each card, then your ratio is a lot better in the eyes of creditors and banks. The limit they like to see is something under a 30% debt to available balance. For example a 3,000 balance or less on a 10,000 limit credit card.

So play it smart and look past all the consolidation offers. They are nothing but a scam to get you indebted for life to these places and tie up any equity you might have with frivolous debt.

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